WORKS  MANAGEMENT 


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WOEKS  MANAGEMENT 


BY 

WILLIAM1DUANE  ENNIS,  M.  E. 

MEMBER  AMERICAN   SOCIETY   MECHANICAL  ENGINEERS 
PROFESSOR  OF  MECHANICAL  ENGINEERING  IN 
THE    POLYTECHNIC    INSTITUTE    OF    BROOKLYN 


McGRAW-HILL    BOOK   COMPANY 
239  WEST  39TH  STREET,  NEW  YORK 

6  BOUVERIE  STREET,  LONDON,  E.  C. 
1911 


COPYRIGHT,  1911 

BY 
McGRAw-HiLL  BOOK  COMPANY 


Printed  and  Electrotyped 

by  The  Maple  Press 

York,  Pa. 


TO 
THE    MEMORY    OF 

MY    FATHER 

MANAGER    OF    THE    ONE    WORKS    FOR    A 
QUARTER    OF    A    CENTURY 


241315 


PREFACE 

In  a  former  book  (Linseed  Oil:  An  Industrial  Manual],  the 
present  writer  has  undertaken  to  discuss  some  of  the  condi- 
tions of  efficiency  in  a  special  industry.  It  seems  to  be  the 
current  belief  now  that  there  exists  an  art  of  management  with- 
out regard  to  special  application;  that  there  are  underlying 
principles  of  efficiency  germane  to  any  business.  Participation 
in  this  belief  has  suggested  the  present  volume. 

Every  American  is  concerned  that  the  United  States  may 
attain  and  maintain  industrial  supremacy.  We  no  longer  hold 
with  Carlyle  and  Ruskin  that  machinery  is  bad.  Machinery  is  a 
blessing  to  man.  It  has  permitted  him  to  substitute  head  work 
for  hand  work  and  has  made  him  free. 

We  can  have  no  industrial  supremacy  as  we  go  on  now.  We 
are  the  most  wasteful  nation  on  earth.  We  burn  up  money  in 
human  lives,  wasted  by  preventable  disease.  We  recklessly 
consume  our  natural  resources  of  land,  forest  and  mine.  No- 
where do  we  waste  more  thoroughly  or  more  rapidly  than  in  our 
factories;  nowhere  are  we  more  childish  than  in  some  of  our 
" business"  methods. 

The  remedy  is  not  this  or  that  widely  heralded  "  system. " 
Industrial  incapacity  is  not  a  specific  disease  needing  an  antidote: 
it  is  a  characteristic  of  our  frame,  which  we  must  survive  and 
outgrow.  No  one  of  us  is  individually  greatly  to  blame;  we  are 
all  greatly  to  blame  as  a  people,  because  we  do  not  do  the  best  we 
can.  Profits  are  no  index  to  efficiency.  A  man  may  be  rich,  yet 
a  spendthrift. 

The  growth  of  a  philosophy  of  works  management  has  been 
an  American  growth.  This  philosophy  is  one  that  comes  home  to 
every  individual,  no  matter  how  far  he  be  removed  (as  he  may 
think)  from  industrial  affairs.  Every  man  should  know  some- 
thing of  the  new  ideals  of  industrial  management.  Superficial 
knowledge  may  have  little  available  value,  but  there  are  things 
so  important  that  we  must  all  know  something  about  them,  even 
if  that  something  have  only  the  force  of  a  suggestion.  To  the 

vii 


viii  PREFACE 

administrator  of  the  factory  the  subject  of  management  comes 
with  infinitely  greater  force.  He  has  only  in  part  originated  it; 
it  has  had  some  portion  of  its  genesis  in  extraneous  sources, -but 
he  had  best  take  hold  of  it  and  work  with  it  if  he,  individually,  is 
to  survive. 

This  book  is  not  (other  than  incidentally)  a  presentation  of 
Taylorism.  No  one  could  more  than  the  writer  admire  the 
thoroughness,  the  certainty,  of  the  achievements  of  Mr.  F.  W. 
Taylor  in  cost-reduction,  particularly  in  the  machine  shop  and 
engineering  works;  nor  the  far-reaching  scope  of  his  conclusions; 
nor  (most  of  all)  that  reticence  and  scientific  spirit  which  induced 
him  to  say  almost  nothing  about  his  work  for  nearly  a  generation, 
until  he  had  proved  it.  But  Mr.  Taylor's  machine  shop  accom- 
plishments are  largely  matters  of  mechanical  method  rather  than 
of  jnanagement,  and  his  plan  of  management  is  not  a  universal 
plan. 

It  has  seemed  that  a  presentation  of  some  underlying  principles 
of  factory  administration  in  general  would  be  profitable.  There 
are  industrial  management  problems  to  be  attacked  by  other 
methods  than  those  which  have  had  widespread  recent  discus- 
sion. There  is  no  text-book  on  management;  no  primer  for  the 
novice.  The  subject  cannot  be  taught  in  books.  The  novice 
must  learn  a  great  many  things  about  management  before  he 
can  intelligently  read  a  book  on  the  subject.  Such  books  as  we 
have  are  not  the  books  that  he  should  even  then  first  read  for 
his  definite  instruction.  They  deal  with  cost-keeping  and  records 
in  a  highly  specialized  way;  with  filing  systems  and  conventions, 
and  the  mechanism  of  administration;  with  applications  to  some 
special  trade  which  may  have  no  interest  to  the  reader,  or  with 
philosophical  generalizations  which  may  inspire  us  but  give  us 
no  very  clear  conception  of  what  it  is  all  about. 

The  writer  endeavors  here  to  be  specific  as  to  some  of  the 
principles  which  underlie  the  methods  of  what  seems  to  him 
good  management.  In  truth,  no  one  man  could  have  had  the 
experience  to  write  such  a  book  as  it  should  be  written;  this  book 
is  admittedly  sketchy,  incomplete,  in  some  phases  very  ele- 
mentary; but  one  man  may  contribute  what  he  best  can.  And 
every  man  should.  For  industrial  administration  is  the  vital 
human  problem  in  its  latest  aspect.  Increase  of  profit  through 
better  management  costs  no  man  anything  and  benefits  every 


PREFACE  ix 

man  in  some  measure.  There  can  be  no  danger  that  the  antagon- 
ism of  labor  organizations  or  the  apprehension  of  the  public  may 
destroy  the  newly-created  ideals  of  increased  production.  To 
increase  the  labor-hour  production  has  been  justly  called  the 
"highest  human  good."  Dean  Swift's  well  known  eulogy  of  the 
man  who  makes  two  blades  of  grass  grow  where  one  grew  before 
appeals  to  universal  human  nature. 

The  man  who  argues  for  a  restriction  of  production,  for 
" soldiering"  deliberate,  or  for  that  apathy  and  conservatism 
which  are  equally  harmful,  is  arguing  against  progress.  He  is 
on  the  wrong  side  of  a  moral  issue. 

POLYTECHNIC  INSTITUTE  OF  BEOOKLYN, 
NEW  YORK,  1911. 


NOTE. —  A  number  of  exercises,  mostly  numerical, 
have  been  incorporated  at  the  end  of  the  text  matter 
(page  174).  These  are  intended  for  use  where  the  book 
is  employed  in  class-room  instruction,  to  emphasize  the 
principles  and  illustrations  presented.  Many  of  these 
problems  will  seem  absurdly  simple  to  readers  having 
had  business  experience ;  but  it  is  thought  that  they  are 
of  a  class  in  which  the  average  student  is  exceedingly 
apt  to  err. 


CONTENTS 

PAGE 

CHAPTER  I.     MANAGEMENT  UNITS 1 

Cost  divisors.  The  consumption  unit  cost  divisor.  Unit  costs. 
Unit  costs  and  the  consumption  unit  divisor. 

CHAPTER  II.     COST  ELEMENTS  AND  CLASSIFICATIONS 8 

The  elements  of  cost.'  Cost-keeping  generalizations.  Classification 
of  accounts.  Method  of  using  the  classification. 

CHAPTER  III.     STATISTICAL  RECORDS 17 

Establishing  consumption  records.  Unnecessary  statistics.  Total- 
ized curves.  Totalizations  and  comparisons.  Consumption  totali- 
zation. Special  records. 

CHAPTER  IV.     LABOR 29 

Labor  cost  apportionment.  Systems  of  paying  labor.  Profit- 
sharing.  The  Halsey  premium  system.  The  differential  piece  rate 
system.  The  Gannt  bonus  plan.  The  Emerson  "  efficiency  "  system. 
Remarks.  Profit-sharing  as  a  management  problem.  The  introduc- 
tion of  profit-sharing  systems.  Objections  to  modern  labor  systems. 
Apprenticeship.  The  effect  on  the  workman. 

CHAPTER  V.     MATERIAL 55 

Cost-keeping  system.  Purchasing  methods.  Inspection.  Central- 
ized buying.  Purchasing  problems.  The  place  of  the  storeroom. 
Storeroom  accounts.  Stock  despatching.  The  stores  department 
in  the  mechanism  of  production.  Economy  in  materials. 

CHAPTER  VI.     BURDEN 72 

Departmental  division.  Unit  division.  Division  on  the  basis  of 
equivalent  values.  The  direct  labor  basis;  time;  value.  Horse- 
power and  time  bases.  Objections  to  these  systems.  Discussion  of 
relationships.  Recapitulation.  Objections  to  the  definite  system. 

CHAPTER  VII.     DEPRECIATION 82 

Reasons  for  depreciation.  Systems  of  depreciation.  Depreciation 
rates.  The  depreciation  fund.  Tables.  Betterments.  Deprecia- 
tion accounting. 

CHAPTER  VIII.     INDUSTRIAL  ORGANIZATION 100 

The  plant  must  grow.  The  manager  as  a  watch  dog.  Insurance. 
Fire  losses  in  the  United  States.  The  general  forms  of  industrial 
ownership.  The  corporation.  Organizing  an  industry  on  corporate 
lines.  Patents.  Forms  of  industrial  organization.  Building  up  the 
organization.  Technical  training,  its  successes  and  failures.  Organ- 

XI 


xii  CONTENTS 


ization  axioms.  Line  organization.  Divisional,  Departmental  and 
Staff  organization.  Selling  systems.  The  salesman's  record.  Whole- 
saling. Agency.  Consignments.  Integrated  industries.  The  new 
type  of  works  manager.  The  organization  of  labor.  Labor  warfare. 

CHAPTER  IX.     PRINCIPLES  OF  ACCOUNTING 136 

The  three  rules.  Summing  up.  Books  of  account.  Inventory. 
Example.  Examples  of  statements. 

CHAPTER  X.     PLANT:  THE  PHYSICAL  BASIS  OF  THE  INDUSTRY 148 

Systems  for  carrying  on  construction  work.  General  principles  of 
plant  location.  Desirable  characteristics  of  site.  Preliminary  plan- 
ning. Building  standards.  Process  mapping.  Grouping  of  Build- 
ings. Transportation  questions  in  grouping.  Other  considerations 
in  grouping.  Buildings,  types  and  materials.  Construction  con- 
tracts. Valuations  of  manufacturing  plant.  Power  valuations. 

PROBLEMS .   174 


WORKS  MANAGEMENT 


CHAPTER  I 

MANAGEMENT  UNITS 

The  public  has  had  every  opportunity,  in  recent  months,  of 
learning  the  significance  of  the  term  Scientific  Management. 
Not  only  have  the  engineering  periodicals,  with  some  degree 
of  unanimity,  propounded  its  principles;  even  the  popular 
monthlies  and  the  daily  press  have  taken  up  this  or  that 
" system"  as  matters  of  news  value  and  general  interest. 

Yet  what  scientific  management  really  is  may  perhaps,  in 
many  minds,  be  still  doubtful.  Its  exponents  take  too  much 
for  granted.  They  deal  with  generalizations  and  illustrations. 
For  the  most  part  they  have  failed  to  establish  any  fundamental 
scientific  principle.  Valuable  as  their  discussions  have  been, 
they  have  been  valuable  as  inspiration  rather  than  as  precepts. 

As  a  matter  of  fact,  management  is  rather  an  art  than  a 
science.  To  some  extent,  the  manager,  like  the -poet,  is  born, 
not  made.  To  reduce  management  to  a  compact  and  complete 
body  of  rules  and  principles  is  chimerical,  and  any  attempt  to 
do  so  must  fail.  Yet  there  are,  as  in  all  arts,  certain  established 
methods,  customs  and  expressions;  defined  things  to  be  observed 
or  avoided;  a  partly  explored  and  charted  route.  It  is  an 
entirely  feasible  thing  to  present  these  matters  in  orderly  form 
for  the  guidance  of  those  whose  avocations  are  supervisory 
and  who  seek  to  profit  by  the  accumulated  experience  of  others. 

Management,  then,  is  the  science  or  art  of  reaching  a  given 
end  with  economy  of  means;  of  creating  a  material  or  ideal 
product  with  the  minimum  of  expenditure.  In  the  broadest 
sense,  all  of  our  interests  call  for  the  exercise  of  management. 
The  education  of  a  child  is  subject  matter  for  the  application  of 
management  of  the  highest  type;  but  here  the  product  is  not  of 
that  material  class  with  which  we  are  at  present  concerned. 
From  our  standpoint,  management  is  evidenced  in  the  transfor- 

1 


2  'VPORKS  MANAGEMENT 

mation  of  tangible  objects  from  one  condition  to  another  by 
the  application  of  human  effort;  and  good  management  is 
applied  when  such  transformation  is  efficiently  consummated. 

The  conception  of  efficiency  is  with  the  engineer  one  of  perfect 
definiteness.  Efficiency  is  the  quotient  of  the  thing  accom- 
plished by  the  effort  expended,  of  effect  by  cause,  both  being 
measured  in  the  same  definite  unit.  In  heat  engineering,  this 
unit  is  the  foot-pound,  or  British  thermal  .unit.  The  obvious 
unit  for  measuring  efficiency  in  management  is  the  dollar;  and 
from  this  standpoint,  efficiency  is  the  quotient  of  receipts  by 
expenses,  its  numerical  value  being  evidenced  by  profits. 

The  dollar  (or  its  exchange  equivalent)  is  scarcely  a  definite 
unit  when  we  consider  extreme  variations  in  place  and  time. 
Possibly  the  final  unit  of  efficiencies  and  values  is  the  labor-hour; 
so  that  product  should  be  measured  in  proportion  to  the  hours 
of  labor  it  commands,  and  cost  in  the  labor-hours  consumed. 
But  this  aspect  of  the  question  is  academic  rather  than  practical. 

COST  DIVISORS 

Of  the  two  factors  which  define  efficiency,  the  first,  that  of 
effect,  receipts,  products,  is  rather  easily  known.  The  deter- 
mination of  causes,  costs,  consumption,  particularly  if  any 
degree  of  subdivision  is  desired,  is  more  difficult.  Since  manage- 
ment efficiency  is  to  be  measured  in  dollars,  the  principal  field 
for  investigation  is  that  of  costs.  A  thorough  study  of  costs 
therefore  covers  a  large  part  of  the  whole  field  of  management. 

In  order  that  statements  of  cost  may  have  the  greatest  signi- 
ficance, all  costs  must  relate  to  some  common  unit.  Thus,  in  a 
power  plant,  we  are  to  analyze  not  the  whole  cost  of  fuel  in  a 
month  or  year,  but  its  cost  per  kilowatt-hour  of  output.  In  a 
gas  works,  the  interesting  figure  is  not  the  monthly  consumption 
of  coal,  but  the  consumption  per  thousand  cubic  feet  of  gas  made. 

Here  the  cost  "divisor"  or  "unit"  or  "basis,"  as  it  may  be 
described,  is  a  unit  of  production — the  kilowatt-hour  or  the 
thousand  cubic  feet  of  gas.  This  constitutes  a  satisfactory 
sort  of  divisor  only  when  the  product  is  an  invariable  staple. 
In  neither  of  the  illustrations  given  is  the  product  absolutely 
invariable.  A  kilowatt-hour  in  2200  volt  3  phase  alternating 
current  is  different,  and  may  involve  a  different  cost  of  pro- 
duction, from  a  kilowatt-hour  in  220  volt  direct  current.  A 


MANAGEMENT  UNITS  3 

cubic  foot  of  illuminating  gas  may  -vary  in  composition  from 
day  to  day  or  from  hour  to  hour;  and  a  gas  works  produces  and 
sells  several  things  besides  gas.  Yet  for  commerical  purposes 
the  kilowatt-hour  or  the  cubic  foot  of  gas  is  frequently  regarded 
as  an  invariable  unit  and  is  far  more  nearly  so  in  point  of  fact 
than  many  others  commonly  treated  as  invariable. 

Divisors  of  this  sort — production  units — are  used  in  a  large 
majority  of  industries;  as  in  those  concerned  with  the  manu- 
facture of  fabrics,  textiles,  many  oils,  paints,  liquors,  food-stuffs 
and  the  like. 

As  an  example  of  an  industry  in  which  the  productive  unit, 
although  constantly  employed  for  the  purpose,  is  an  unsatis- 
factory cost  divisor,  consider  a  paper  mill.  The  definite  unit 
is  the  pound  (or  hundred  pounds)  of  paper.  The  expenditures 
for  steam,  labor,  bleach,  etc.,  are  all  reduced  each  month  to  the 
comparative  figures  per  pound  or  hundredweight  of  paper 
made.  Yet  in  a  soda-process  book-paper  mill,  a  machine  which 
could  turn  out  7  tons  of  heavy  cartridge  paper  per  day  would 
be  doing  equally  well  when  it  produced  5  tons  of  ordinary 
book,  or  3  tons  of  light  "bond"  paper.  The  whole  expense 
for  labor  would  be  about  the  same  in  either  of  the  cases;  the 
unit  cost  of  steam  would  be  a  maximum  for  the  bond  paper. 
If  the  pound  of  paper  is  used  as  the  cost  divisor,  regardless  of 
grade,  then  all  divided  costs  will  appear  high  in  mills  where 
much  bond  paper  is  made  and  all  will  appear  low  where  cartridge 
is  the  product.  A  comparison  of  costs  as  between  the  two  kinds 
of  mill  will  be  of  little  significance. 

Furthermore,  a  similar  condition  of  things  holds  in  the  average 
mill  making  several  kinds  of  paper.  The  relative  costs  to  pro- 
duce the  various  kinds  are  guessed  at,  or  prices  are  adjusted  to 
meet  competition,  on  the  principle  that  the  mill  must  be  kept 
running;  so  that  as.  a  result  certain  grades  may  actually  be  sold 
at  a  loss. 

There  are  two  ways  of  improving  this  situation.  If  the 
product  may  be  grouped  into  a  few  general  classes,  then  costs 
may  be  kept  over  irregular  periods  during  each  of  which  a  run 
is  made  on  a  particular  class.  Instead  of  obtaining  average 
costs  monthly,  we  should  then  obtain,  say,  after  a  three  weeks' 
run  on  cartridge  paper  a  cost  statement  for  that  run;  after  a 
further  operation  of  six  weeks  on  book  paper  a  statement  of 
the  results  of  that  operation;  and  so  on. 


4  WORKS  MANAGEMENT 

The  second  method  is  perhaps  simpler,  and  is  the  only  one 
available  when  the  orders  are  "short,"  i.e.,  when  the  grades  of 
product  change  frequently.  It  involves,  besides  usual  monthly 
average  statements,  the  obtaining  of  special  costs  by  grades 
from  records  covering  occasional  runs  on  the  different  grades. 
This  means,  virtually,  putting  the  factory  under  a  "test." 

THE  CONSUMPTION  UNIT  COST  DIVISOR 

There  are  certain  industries  in  which  no  single  staple  product  is 
made,  but  in  which  a  single  staple  raw  material  is  consumed. 
Take,  for  example,  the  case  of  a  linseed-oil  mill.  Here  flaxseed 
is  crushed  and  the  oil  expressed,  and  two  prime  products — the 
oil  and  the  pressed  "cake" — besides  a  number  of  specialties, 
are  sold.  The  oil  is  the  most  valuable  product,  and  in  deter- 
mining its  selling  price  it  is  necessary  to  consider  the  cost  of  the 
seed,  the  yield  of  oil  and  cake  from  the  seed,  the  cost  of  mill 
operation  and  the  price  obtained  for  the  cake. 

The  yield  of  oil  varies  greatly  with  the  character  of  the  seed 
purchased,  but  there  is  no  corresponding  variation  in  the  cost 
of  working.  If  oil  production  were  used  as  a  cost  divisor, 
costs  would  appear  high  whenever  a  low-yielding  seed  was  used. 
Yet  this  seed  might  be  offered  at  so  low  a  price  that  it  would  be 
desirable  to  employ  it;  or,  conceivably,  the  cake  value  from 
such  seed  might  be  unusually  high.  From  the  management 
standpoint,  the  best  cost  divisor  is  the  consumption  unit,  rather 
than  the  production  unit;  the  number  of  bushels  of  flaxseed 
treated,  for  example.  This  is  the  usual  cost  divisor  in  linseed 
mills.  In  cottonseed-oil  works,  the  divisor  is  the  number  of 
tons  of  seed  worked. 

UNIT  COSTS 

In  the  great  majority  of  engineering  works,  the  product  is 
diversified,  and  no  single  divisor  is  possible.  There  may  have 
been  a  time  in  a  locomotive  plant  when  a  reduction  of  all  costs 
to  "so  much"  per  locomotive  would  have  been  satisfactory; 
but  at  the  present  time  weights  and  costs  of  locomotives  differ 
to  such  an  extreme  degree  that  the  only  possible  divisor  is  one 
of  weight — the  pound,  the  ton  or  the  hundred  tons;  the  last  is 
the  divisor  used  (when  any  is  used)  in  the  majority  of  the 
locomotive  works  of  this  country. 


MANAGEMENT  UNITS  5 

But  suppose  such  works  to  build  not  only  locomotives  of  a 
great  variety  of  sizes,  but  also  steam  shovels,  snow  plows  and 
(to  make  the  illustration  more  striking)  aeroplanes.  Cost 
will  then  bear  no  relation  to  weight.  The  same  condition  holds 
in  the  large  electrical  manufacturing  plants,  where  thousands 
of  articles  are  made,  ranging  from  a  15-cent  incandescent  lamp 
up  to  a  hundred-thousand-dollar  generator. 

An  obvious  way  of  handling  such  cases  would  be  to  divide 
the  works  into  departments,  in  each  of  which  the  volume  of 
production  of  some  standard  product  would  be  the  cost  divisor 
for  the  expense  of  operating  that  department.  This  is  some- 
times done.  The  same  idea  underlies  a  more  common  method 
of  comparing  costs  in  a  works  making  a  diversified  product; 
that  method  in  which  instead  of  dividing  total  costs  by  a  figure 
representing  either  product  turned  out  or  raw  material  con- 
sumed, no  such  thing  as  " total  cost"  is  recognized. 

In  this  system,  every  expenditure  either  for  labor  or  for 
materials  is  immediately  charged  against  the  item  of  output 
affected.  Thus,  suppose  a  plant  having  a  pay-roll  of  $1000  to 
produce  concurrently  20  motors  of  a  certain  type.  Under  the 
cost  divisor  system,  the  labor  cost  would  have  been  reckoned 
at  $1000-=- 20  =  $50  per  motor.  But  suppose  the  plant  to  pro- 
duce both  20  of  these  motors  and  6000  incandescent  lamps, 
under  a  pay  roll  of  $1200;  of  which  labor  cost,  $300  represented 
expenditure  for  producing  lamps  and  $900  for  producing  motors. 
The  cost  of  labor  per  motor  is  then  $900  -r-  20  =  $45,  and  that 
per  lamp  is  $300-^6000  =  $0.05.  Expenses  for  materials 
would  be  handled  in  the  same  way. 

This,  then,  represents  the  extreme  of  complication  in  cost 
finding.  As  far  as  labor  costs  are  concerned,  the  necessary  data 
are  derived  from  the  time  cards,  on  which  the  day-workman 
must  show  the  disposition  of  every  hour  of  his  time;  or  the  piece 
work  slip,  on  which  the  contract  worker  must  show  the  pro- 
duction for  which  he  claims  remuneration. 

But  with  material  costs  more  difficulty  may  be  experienced. 
No  special  purchase  of  material  is  made  in  order  that  20  motors 
(to  return  to  our  illustration)  may  be  produced;  the  pig  iron, 
sheets  and  copper  are  obtained  in  bulk,  and  may  be  intended 
for  use  not  only  in  the  building  of  these  motors  but  also  for 
various  other  purposes,  perhaps  some  months  in  the  future. 

When   these    materials    are   purchased,    it   is   impossible   to 


6  WORKS  MANAGEMENT 

charge  them  against  the  specific  production  in  which  they  may 
be  employed;  and  here  is  evolved  the  fundamental  need  for  the 
stock  department  or  store  room.  To  this  important  department 
all  standard  materials  will  be  charged.  It  in  turn  will  charge 
against  production  those  materials  issued  for  production;  and 
it  must  account,  either  by  inventory  or  by  charges  against 
specific  items  of  output,  for  everything  it  receives. 

UNIT  COSTS  AND  THE  CONSUMPTION  UNIT  DIVISOR 

In  the  utilization  of  a  cost-finding  system  to  determine  selling 
prices,  it  sometimes  happens  that  various  trade  " differentials" 
or  variations  in  price  to  cover  more  or  less  variation  in  product 
are  found  to  be  unfair.  A  linseed-oil  mill,  for  example,  sells  not 
only  raw  linseed  oil  in  bulk,  and  oil  cake;  it  sells  also  various 
boiled  and  refined  oils,  meal  (ground  cake)  and  oil  in  barrels. 

Unless  some  caution  is  exercised  in  computing  unit  costs  in 
a  case  like  this,  an  incorrect  statement  of  cost  of  the  staple 
product  will  be  obtained.  For  example,  most  linseed-oil  mills 
make  a  computation  like  the  following: 

Cost  of  1  bu.  of  flaxseed $1 .00 

Cost  of  mill  operation,  per  bushel 25 


1.25 
Produced    36    Ib.   cake,    from  which  revenue 

derived  was. . .  .36 


Leaving  as  the  cost  of  oil  from  1  bu.  of  seed.  .         .  89 
Nineteen  Ibs.  of  oil  were  produced:  therefore 

cost  per  pound  is .  04684 

Following  usual  practice,  375  Ib.  (50  gal.)  of  bulk  oil  (i.e., 
oil  in  tanks)  could  be  sold  at  the  mill  for  $17.57.  With  the 
established  differential  of  2  cents  per  gallon  for  oil  in  barrels, 
this  same  oil,  in  a  barrel,  could  be  sold  for  $18.57. 

Now  suppose  that  during  the  period  discussed  100,000  bu. 
of  flaxseed  were  treated,  the  total  mill  operating  cost  of 
100,000  X  $0.25- $25,000  consisting  of  $15,000  of  expense 
incurred  in  producing  raw  bulk  oil  and  unpacked  cake,  and 
$10,000  of  such  expenses  as  freight  on  oil  and  cake,  cost  of 
boiling,  refining  and  barreling  oil  and  grinding  cake,  etc.  Sup- 
pose also  that  a  part  of  this  $10,000— say  $1,000— was  expended 


MANAGEMENT  UNITS  7 

in  barreling  35,000  gal.  of  oil;  the  remainder  of  the  oil  being 
delivered  in  bulk. 

It  would  seem  then  that  the  mill  operating  cost  for  producing 
bulk  raw  oil  is  $15,000  or  15  cents  per  bushel,  and  that  the  cost 
per  pound  of  such  oil,  at  the  mill,  is  not  $0.04684,  as  computed, 
but  ($1  .00  +  $0  .  15  -  $0  .  36)  -^  19  =  $0  .  04158.  The  equivalent  of  a 
barrel  of  this  oil  could  be  sold  for  375  X  $0.04158  =  $15.59; 
while  the  same  oil,  in  a  barrel,  would  cost 


This  same  point  might  easily  be  made  the  subject  of  several 
illustrations.  The  cost  of  barreling  has  now  been  separated 
from  other  expenses,  and  applied  against  the  amount  of  oil 
barreled.  A  similar  procedure  should  be  followed  with  the 
costs  of  packing  cake,  grinding  cake  to  meal  and  bagging  the 
meal,  and  boiling  and  refining  oil.  In  each  case  the  expenditure 
will  be  separated  from  that  incurred  in  producing  the  staple 
product,  and  applied  against  the  specialties  produced  thereby. 

The  principle  thus  presented  is  applied  in  a  broad  way  in 
many  industries  in  connection  with  costs  of  freight  on  product. 
Freight  expenses  are  not  included  in  manufacturing  costs;  the 
latter  cover  only  such  expenses  as  are  necessary  to  deliver  the 
product  ready  for  shipment;  and  the  individual  customer  should 
be  "quoted"  such  a  price  that  he  will  ultimately  pay  the  freight 
(if  it  is  "  prepaid")  on  his  own  particular  shipment. 


CHAPTER  II 

COST  ELEMENTS  AND  CLASSIFICATIONS 

Standards  of  method  and  efficiency  in  industry  vary  widely. 
Every  business  has  its  conventions.  No  one  has  ever  formally 
classified  industrial  enterprises.  We  have  now  an  extension1  of 
the  Dewey  decimal  system,  worked  out  in  great  detail  to  cover 
the  range  of  engineering  information;  this  might  be  used  as  a 
basis  for  our  present  purpose,  but  it  would  classify  industries 
according  to  their  technical  rather  than  their  commercial 
relations. 

Physical  proximity,  similarity  of  organization  or  machinery 
or  of  raw  materials  used,  are  insufficient  bases  for  grouping 
enterprises  into  a  class.  The  broad  division  into  "  manufactur- 
ing" and  " trading"  industries  is  inadequate;  so  also  is  the 
grouping  into  engineering  works  (shipyard),  process  works 
(paper  mill) ,  and  public  works  (city  gas  plant) . 

The  present  writer  has  suggested2  the  use  of  the  "  determining- 
ratio"  first  cost  of  plant  -*-  value  of  annual  output  as  permitting 
of  a  degree  of  classification  of  industrial  enterprises  into  groups 
characterized  each  by  standards  of  equipment,  organization  and 
method;  and  as  explaining  certain  dissimilarities  in  those  stand- 
ards between  different  groups.  This  determining  ratio  appears 
to  be  of  useful  application  in  connection  even  with  individuals 
and  machines  as  well  as  with  industrial  plants. 

As  a  simple  illustration,  consider  two  power  stations,  precisely 
equal  in  capacity,  one  of  which  runs  continuously  while  the  other 
is  merely  the  reserve  auxiliary  to  a  water  power  development, 
operating  say  not  over  48  hours  in  the  year.  The  first  will  have 
the  most  economical  machinery  attainable,  almost  regardless  of 
cost;  the  latter  will  have  the  simplest  and  cheapest  machinery, 
almost  regardless  of  thermal  efficiency.  In  the  one  case,  operat- 
ing expenses  per  unit  of  product  are  large  in  proportion  to  those 
fixed  charges  which  are  reduced  by  a  large  production  divisor. 

1  Bulletin  No.  9  of  the  University  of  Illinois  Engineering  Experiment  Station,  November, 
1906. 

2  The  Classification  of  Industrial  Enterprises,  Stevens  Institute  Indicator,  January,  1908. 


COST  ELEMENTS  AND  CLASSIFICATIONS          9 

In  the  other  case,  the  rate  of  fixed  charge  per  unit  of  output  is 
necessarily  high,  because  the  output  is  low.1 

The  two  types  of  plant  will  usually  be  differentiated  by  any 
engineer  by  reference  to  what  is  called  the  load  factor.  The 
determining  ratio  here  suggested  is  in  a  sense  a  load  factor  (or 
rather  a  function  of  its  reciprocal),  and  is  of  more  general  appli 
cation  than  the  latter.  This  question  will  not  be  discussed 
further.  It  has  been  introduced  here  because  the  reader, 
associated  with  some  special  industry,  may  find  some  of  the 
principles  presented  to  be  inapplicable  in  his  work  and  may 
therefore  doubt  their  soundness.  The  prediction  is  ventured  that 
when  any  well-ordered  business  departs  widely  from  the  practices 
to  be  discussed,  the  explanation  will  be  suggested  by  a  study  of 
the  " determining  ratio"  suggested,  as  it  works  out  for  that 
particular  business. 

THE  ELEMENTS  OF  COST 

The  items  of  cost  which  most  directly  and  obviously  enter 
into  the  total  cost  of  any  manufactured  article  are  labor  and 
materials.  In  fact,  all  expenditures  are  for  one  of  these  two 
items;  perhaps  ultimately  for  the  first  alone.  But  in  the 
special  sense,  labor  and  material  costs  include  only  those  expen- 
ditures for  these  commodities  which  can  be  directly  charged  against 
the  item  of  production  considered. 

Besides  these,  there  is  a  cost  called  expense  or  burden,  which 
cannot  be  regarded  as  either  labor  or  material.  For  example, 
in  the  building  of  an  engine,  provision  might  be  made  for  certain 
tests  and  analyses  of  cast  iron,  involving  an  expenditure  clearly 
applicable  to  this  particular  output.  This  would  be  direct  ex- 
pense; expense,  because  it  is  neither  labor  nor  materials  and 
does  not  become  a  part  of  the  product;  direct,  because  it  is 
clearly  chargeable  to  the  engine  in  question.  The  three  items, 
labor,  materials  and  direct  expense,  make  up  what  may  be  called 
the  direct  cost. 

In  addition,  we  have  the  item  of  factory  expense,  including 
such  elements  as  lighting,  repairs,  taxes,  and  factory  office 

1  So  also  the  steadily-running  power  plant  will  have  a  high  grade  chief  engineer,  expert  in 
fuel  economy,  while  the  reserve  plant  will  get  along  with  any  man  capable  of  starting  up  and 
keeping  going  in  an  emergency.  In  the  first  plant  we  will  find  flue  gas  recorders  and  com- 
position indicators  and  all  other  devices  likely  to  ensure  economy  through  scientific  method ; 
in  the  second  there  will  be  nothing  of  the  sort,  since  it  is  a  matter  of  comparatively  little 
importance  whether  the  boilers  are  efficiently  operated  or  not. 


10  WORKS  MANAGEMENT 

salaries;  the  total  of  which,  added  to  the  direct  cost,  gives  the 
factory  cost.  Included  in  factory  expense  (in  small  works)  is  the 
general  administration  cost.  In  larger  works,  this  expense  may 
(because  applicable  to  a  number  of  factories  or  for  other  reason) 
be  separately  noted,  as  is  also  the  item  of  selling  expense. 

The  following  chart  then  shows  the  grouping  of  the  items 
which  make  up  the  market  price  of  an  industrial  product: 

Value 
Cost  Profit 


Labor           Materials 

|                       j 

Direct        Factory  Expense 
Expense                   | 

Day 

Piece    Stock    Special 

Direct 

,      fRemt    T  io-Vif 

Indirect 
(Office; 

Prime  Cost 
i 

Heat,  Power, 
Superintendence, 

Repairs  and  Replacements, 

IS  on-productive  Labor, 

Depreciation,  Insurance, 

Taxes,  etc.) 


Factory  Cost 


Selling  Expense  Administration  Expense 

(General  Offices) 


Salesmen's  Sal-    Freight  on        Salesrooms 
aries,  Expenses       Product 
and  Commissions 

The  problem  of  cost  keeping  is  to  ascertain  the  amount  of 
expenditure  for  each  of  these  items,  chargeable  against  each 
unit  of  product.  This  is  a  sufficiently  easy  matter  where  a  single 
staple  is  either  the  product  or  the  raw  material;  a  far  more  difficult 
matter  where  the  output  is  diversified;  and  in  no  case  is  this 
problem  the  whole  problem  of  management. 

The  manager  must  not  only  know  costs  in  this  degree  of  detail; 
he  must  know  the  reasons  for  the  costs  which  exist  and  whether 
they  are  what  they  should  be.  In  order  to  determine  as  to  the 
first  point  he  must  consider:  1.  the  price  paid  per  unit  of  raw 
material  (in  the  broadest  sense,  including  all  items),  a  matter  of 
purchasing;  2.  the  consumption  of  raw  material  per  unit  of  prod- 
uct, a  matter  of  superintendence;  3.  the  cost  of  raw  material 
per  unit  of  output,  a  matter  of  general  management. 


COST  ELEMENTS  AND  CLASSIFICATIONS        11 

In  order  to  determine  the  degree  of  approximation  of  his  costs 
to  ideal  costs,  he  must  further  investigate  these  three  points  in 
detail,  attempting  by  scientific  methods  to  establish  ideal 
standards  of  performance  for  every  operation.  It  is  in  this 
direction  that  the  vocation  of  management  is  becoming  domi- 
nated by  the  engineer.  To  determine  ideal  costs,  and  then  to 
approximate  them;  this  is  the  specific  program  of  the  industrial 
administrator.  The  first  requires  science;  the  second,  executive 
ability.  Thus  far,  training  in  engineering  has,  of  all  types  of 
education,  most  nearly  succeeded  in  combining  the  two. 

COST  KEEPING:  SOME  GENERALIZATIONS 

Cost  keeping  is  something  more  than  a  series  of  tabulations 
and  comparisons  based  on  books  of  account.  It  is  true  that 
bookkeeping  furnishes  much  of  the  data  for  the  statistician,  and 
the  latter  should  not  call  for  original  information,  the  essentials 
of  which  are  already  at  hand  in  the  hands  of  the  accountants: 
but  the  cost  keeper  requires  more  detailed  and  comprehensive 
reports  than  any  with  which  the  accountant  is  concerned.  The 
accountant  seeks  to- know  the  facts;  the  cost  keeper  the  reasons 
for  the  facts.  The  latter  must  constantly  group,  analyze  and 
compare. 

A  cost  system  does  not  produce  economies  and  it  does  add  to 
cost  of  operation.  It  gives  opportunity  for  a  capable  manager 
to  produce  savings,  in  comparison  with  which  the  clerical  and 
other  expense  added  to  operating  cost  is  relatively  trifling.  No 
cost  system,  however  perfect,  can  take  the  pla'ce  of  competent 
management.  Better  no  records  of  cost,  with  a  strong  executive, 
than  the  most  perfect  records,  with  a  weak  administrator.  The 
manager  whose  grip  is  insecure  will  not  strengthen  that  grip  by 
adding  to  his  office  a  costly  clerical  staff. 

The  question  of  cost  of  cost  keeping  is  sometimes  important, 
and  often  overlooked.  Just  how  far  the  manager  should  go  in 
the  matter  of  statistical  records  is  a  debatable  matter.  In 
general,  no  record  should  be  continued  unless  it  is  found  useful 
to  the  management;  but  the  determination  of  usefulness  may  be 
a  matter  of  months  or  even  of  years.  The  system  of  keeping  costs, 
as  will  have  already  suggested  itself  to  the  reader,  must  be 
specifically  adapted  to  the  business,  or  at  least  to  that  group  of 
industries  to  which  the  business  belongs.  Yet  the  technicalities 


12  WORKS  MANAGEMENT 

of  these  systems  are  such  that  it  is  desirable  that  the  general  plan 
of  keeping  costs  should  be  devised  by  an  expert  in  the  matter, 
rather  than  by  an  expert  in  the  particular  business  concerned. 
The  carrying  on  of  a  system  once  devised  may  be  conducted  with 
ordinary  clerical  assistance;  but  the  inherent  tendency  to  degener- 
ation found  in  industrial  systems  is  such  that  in  large  enterprises 
it  will  probably  always  be  best  to  permanently  retain  the  cost 
expert. 

CLASSIFICATION  OF  ACCOUNTS 

In  the  fabrication  of  staple  or  semi-staple  products,  the  items 
of  cost  are  so  many  that  some  grouping  is  necessary.  A  very 
broad  grouping  of  expenditures  has  been  given  in  the  table  on 
page  10.  A  more  detailed  grouping  of  the  elements  (particularly 
those  entering  into  the  prime  cost  or  factory  cost)  is  commonly 
attempted  by  accountants  and  cost  keepers.  The  basis  for  such 
a  grouping  is  what  is  known  as  the  classification  of  accounts. 

As  an  example,  all  operative  expenditures,  in  a  certain  linseed- 
oil  mill,  were  first  separated  from  the  selling  and  administration 
expense.  These  operating  costs  were  then  divided  into  "  manu- 
facturing expense,"  strictly  so-called,  and  "sales  deductions "- 
the  expenditures  for  barreling,  boiling  and  refining,  etc.,  making 
up  the  $10,000  referred  to  on  page  6.  Manufacturing  expense 
was  itself  subdivided  as  follows: 

MANUFACTURING  EXPENSE 

Plant  Steam  Labor 

Superintendent,  Fuel,  Pressmen, 

Watchman,  Water,  Holders, 

Lighting,  Engineers,  firemen,  etc.,  Strippers, 

Mill  expense,  Boiler  repairs,  Packers, 

Press  cloths,  Oils  and  supplies.  Temperers, 

Repairs.  Trimmers, 

Filterers. 

This  classification  is  peculiar  in  that  both  labor  and  material 
items  are  grouped  together  under  "Plant"  and  "Steam." 

A  standard  classification  sheet  of  this  sort  is  used  in  nearly 
every  manufacturing  business.  Special  forms  have  been  devel- 
oped for  gas  works,  paper  mills,  locomotive  shops,  etc.  The  list 
of  accounts,  with  short  instructions  regarding  them,  privately 


COST  ELEMENTS  AND  CLASSIFICATIONS        13 

issued  by  one  large  corporation  to  its  accounting  staff,  makes  a 
pamphlet  of  over  a  hundred  pages.  Railways  group  their  oper- 
ating expenses  into  five  general  classes: 

RAILWAY  OPERATING  EXPENSE 

1.  Maintenance  of  way  and  structures 

2.  Maintenance  of  equipment 

3.  General  expense 

4.  Traffic  expense  (commercial) 

/Power 

5.  Transportation  expense  <  ~ 

The  Interstate  Commerce  Commission  prescribes  in  detail  the 
names  of  the  subordinate  accounts  included  in  each  of  these  five 
groups,  for  both  railways  and  street  railways.  For  a  small  road 
of  the  latter  class,  39  operating  accounts  are  used;  for  a  large 
road  the  number  of  accounts  runs  up  into  the  hundreds. 

The  following  (from  the  1909  Report  of  the  New  York  Public 
Service  Commission,  Second  District)  shows  the  average  operat- 
ing costs  of  75  electric  railways  in  New  York  state,  in  cents  per 
car  mile.  The  numbers  first  given  refer  to  the  standard  enumera- 
tion of  accounts. 

Maintenance  of  Way  and  Structure: 

1.  Track  and  roadway 1 . 602 

2.  Electric  line 353 

3.  Buildings 091       2.046 

Maintenance  of  Equipment : 

4.  Steam  plant 060 

5.  Electric  plant 068 

6.  Cars 768 

7.  Electric  equipment  of  cars 600 

8.  Miscellaneous  equipment 039 

9.  Shop  expense. .  * 125       1 . 660 

Operating  Power  Plant: 

10.  Wages... 345 

11.  Fuel 476 

12.  Lubricants 023 

13.  Miscellaneous  supplies  and  equip. .      .039 

14.  Hired  power 2 . 163       3 .046 

Operation  of  Cars: 

15.  Superintendence 335 

16.  Wages,  conductor 2.507 

17.  Wages,  motormen 2.570 

18.  Wages,  miscellaneous  car  service.      .250 


14  WORKS  MANAGEMENT 

19.  Wages,  car  housemen 448 

20.  Supplies  car  service 124 

21.  Miscellaneous  expense  car  service .      .324 

22.  Hired  equipment 045 

23.  Cleaning  and  sanding  track 125 

24.  Removing  snow  and  ice 109 

25.  Undistributed  expense 063       6.901 

General  expense: 

26.  Salaries,  general  office 333 

27.  Salaries,  clerk. 281 

28.  Printing  and  stationery 046 

29.  Miscellaneous  office  expense 064 

30.  Store  expense 046 

31.  Stable  expense 033 

32.  Advertising  and  attraction 138 

33.  Miscellaneous  general  expense. .. . .      .344 

34.  Damages 985 

35.  Legal  expense  due  to  damages 048 

36.  Legal  expense,  miscellaneous 072 

37.  Rent,  land  and  buildings 050 

38.  Rent,  track  and  terminals 197 

39.  Insurance 208       2 . 845 

Total..  16.498 


In  general,  the  greatest  number  of  specific  accounts  is  included 
in  that  class  which  was  formerly  lumped  by  bookkeepers  as 
" manufacturing"  (factory)  cost.  It  will  easily  be  appreciated 
that  to  devise  a  broad  and  flexible  classification  of  accounts  for 
any  business  involves  much  detailed  knowledge  of  that  business. 
A  proper  classification  is  fundamental  to  proper  accounting,  to 
cost-keeping,  and  in  a  large  measure,  to  good  management. 
Many  firms  keep  their  classification  systems  as  much  to  them- 
selves as  possible;  they  represent  too  great  an  expenditure  of 
time  and  thought  to  be  given  freely  to  the  general  (and  competing) 
public.  ^ 

METHOD  OF  USING  THE  CLASSIFICATION 

Whenever  an  expenditure  is  made,  or  when  goods  are  delivered 
from  the  store-room,  a  corresponding  charge  is  made  to  the  proper 
account.  If  the  classification  of  accounts  has  been  properly 
made,  there  can  never  be  any  real  question  as  to  what  account  is 
chargeable. 

A  method  sometimes  employed  is  to  use  a  voucher  (see  page 
15),  which  is  practically  a  restatement  of  the  amount  of  the  bill, 


COST  ELEMENTS  AND  CLASSIFICATIONS        15 

on  the  reverse  of  which  the  whole  classification  of  accounts  is 
printed,  the  amount  of  the  bill  being  entered  opposite  its  appro- 
priate classification.  This  method  has  the  objection  that  who- 
ever receives  the  voucher  for  signature  sees  and  may  copy  the 
entire  classification  system. 

The  preferred  plan  is  to  designate  all  accounts  by  numbers  or 
letters,  the  meaning  of  which  need  be  known  to  only  a  few  of  the 
clerical  staff.  The  appropriate  number  is  merely  noted  on  the 
face  of  the  voucher. 


VOUCHER 

(Face) 


New  York,    Jan'y  2,  1902 


AMERICAN  PRODUCT  COMPANY, 

To  John  Smith, 


Dr. 


190.1 

Dec. 

12 

200  empty  secondhand  refined  oil 
barrels  ©  $1  .20 

$240 

Vouchered  by  |  Examined  by 


A.  B. 


C.D. 


Approved  for  Entry 
C.D. 


Received        January  3,  1902      of  AMERICAN 
PRODUCT  COMPANY 

Two  hundred  and  Forty  Dollars 

$240.00         in  full  payment  of  above  account. 


Approved  for  Payment 
....E.    F Auditor 


.Secretary 
..Treasurer 


This  voucher  must  be 
signed  by  the  firm  or 
individual  in  whose 
favor  it  is  made. 
When  signed  by  an- 
other, the  authority 
for  doing  so  must  in 
all  cases  accompany  it. 
Name  and  title  of  per- 
son signing  must  bt> 
given  in  full. 


John  Smith. 


WORKS  MANAGEMENT 


VOUCHER 

(Reverse) 


Voucher  No.  695 
AMERICAN  PRODUCT  COMPANY 
Date  Recorded,    Jany  2,  1902 
Date  Paid,  Jaw'  y  2,  1902 
favor 
John  Smith 
for  account 
Philadelphia  mill 

• 
Brought  forward, 

Labor 
Pressmen, 

Molders, 

Strippers, 

Packers, 

Temperers, 

Trimmers, 

MANUFACTURING  EXPENSE 

Filterers, 

Oil  sales  account, 

Plant 

Superintendent, 

Cake  and  meal  sales, 

Watchman, 

Executive  expense, 



Lighting, 

Selling  expense, 

Mill  expense, 

Barrel  account, 

240 

Press  cloths, 

Boiling  and  refining, 



Repairs, 

Freight  and  dray  age, 

Steam 
Fuel, 

Insurance, 

— 

Taxes, 

Water, 

Equipment, 

Engineers,  etc., 

Material, 

Boiler  repairs, 

Discount, 

Oils  and  supplies, 

Contingent  fund, 

Forward, 

Total, 

240 

It  is  not  common  practice  to  make  out  separate  vouchers  for 
payments  of  wages,  although  if  payment  is  made  by  check  it 
would  be  logical  to  do  so.  A  usual  method  is  to  take  the  receipt 
of  the  paymaster  or  manager  for  the  whole  amount  of  the  pay  roll, 
the  attached  pay-roll  or  the  receipt  itself  showing  the  standard 
accounts  chargeable. 


CHAPTER  III 

STATISTICAL  RECORDS 

The  diagnosis  of  management  is  continual,  but  formal  records 
need  be  made  only  at  more  or  less  intermittent  periods.  The 
period-interval  for  the  recording  of  essential  data  may  be  prac- 
tically zero,  as  when  a  recording  instrument  is  employed;  and 
from  this  minimum  it  may  range  up  to  hourly,  daily,  monthly, 
and  even  yearly.  Much  depends  upon  the  kind  of  datum  to  be 
noted.  In  general,  detailed  data  are  recorded  more  frequently 
than  summarizing  data;  consumption  records  may  be  kept  daily; 
price  records,  for  every  purchase;  while  "cost  statements"  are 
more  frequently  taken  at  monthly  intervals. 

ESTABLISHING  CONSUMPTION  RECORDS 

The  class  of  records  in  which  no  dollar  unit  appears — like  that 
of  coal  consumption  per  kilowatt-hour  in  a  power  plant — is  of 
the  first  importance  from  a  management  standpoint,  and  it  is  in 
the  devising  of  such  records  that  the  maximum  of  executive 
capacity  is  frequently  required.  Many  offices  spend  time  and 
money  on  perfectly  useless  consumption  records.  Others  leave 
gaps  that  destroy  the  usefulness  of  a  whole  system.  The  ideal 
is  to  make  the  records  so  consecutively  logical  that  there  is  a 
direct  linkage  of  cause  and  effect,  and  to  discard  any  element  that 
is  not  an  essential  part  of  this  linkage. 

For  example,  in  a  power  plant,  consider  the  question  of  coal 
consumption  per  kilowatt-hour.  The  following  are  among  the 
factors  concerned:  Heat  value  of  the  coal;  boiler  efficiency;  load 
on  the  equipment,  boilers  and  engines. 

The  heat  value  of  the  coal  may  be  fairly  constant,  but  in  pro- 
gressive plants  it  is  common  practice  to  check  this  by  analysis. 
The  boiler  efficiency  is  highly  variable;  to  determine  this  accu- 
rately, we  should  need  to  know  (besides  the  heat  value  of  the  coal) 
the  weight  of  coal  burned,  weight  of  water  evaporated,  feed  water 
temperature,  steam  pressure,  and  quality  or  dryness  of  the 
steam.  Since  much  coal  is  consumed  in  banking  fires,  or  when 

L>  17 


18  WORKS  MANAGEMENT 

the  load  is  light,  it  is  desirable  also  that  there  be  a  continual 
record  of  the  number  of  boilers  (or  amount  of  heating  surface)  in 
service.  In  addition,  to  throw  light  on  the  reasons  for  variation 
in  boiler  efficiency,  there  should  be  some  attempt  made  to  ascer- 
tain the  amounts  of  various  of  the  larger  losses;  which  would 
involve  recording  the  flue  gas  temperature  and  composition,  with 
possibly  the  weight  of  ash  and  the  percentage  of  coal  in  the  ash. 

The  engine  efficiency  (for  engines  of  a  given  type)  will  vary 
chiefly  with  the  load  on  the  engines;  so  that  this  record  must  also 
be  obtained,  either  by  the  use  of  the  indicator  or  by  reading  from 
instruments  the  electrical  output,  if  the  engines  drive  generators. 

This  brief,  rough  outline  will  suggest  the  following  prime 
records: 

1.  Heat  value  of  the  coal,  per  pound;  every  car-load  or  ship- 
ment. 

2.  Weight  of  coal  burned;  intervals  from  1  to  24  hours. 

3.  Weight  of  water  evaporated;  intervals  from  1  to  24  hours. 

4.  Feed  water  temperature;  by  recording  instrument. 

5.  Pressure  of  steam;  by  recording  instrument. 

6.  Dryness  of  steam  (not  necessary,  unless  the  load  fluctuates 
greatly). 

7.  Amount  of  heating  surface  in  service,  each  hour. 

8.  Flue  gas  temperature;  by  recording  instrument. 

9.  Flue  gas  composition   (per  cent,   of  carbon  dioxide) ;  by 
recording  instrument. 

10.  Weight  of  ash;  intervals  from  1  to  24  hours. 

11.  Percentage  of  coal  in  ash;  intervals  from  1  to  24  hours. 

12.  Load  on  engines;  preferably  a  continuous  record. 

Some  of  these  records  will  check  others;  the  flue  gas  tempera- 
ture and  composition,  for  example,  will  usually  be  in  harmony 
with  the  boiler  efficiency,  and  the  load  on  the  engines  will  bear 
a  more  or  less  definite  relation  to  the  amount  of  water  evaporated. 

If  we  drop  the  record  marked  6  as  an  unnecessary  refinement, 
the  eleven  data  remaining  might  lead  to  the  following  principal 
and  auxiliary  statistical  records: 

PRINCIPAL 

a.  Thermal  efficiency  from  coal  to  steam. 

b.  Thermal  efficiency  from  steam  to  power. 

c.  Thermal  efficiency  from  coal  to  power. 

(I.  Pounds  of  coal  consumed  per  unit  of  power  output. 


STATISTICAL  RECORDS  19 

AUXILIAHY 

al.  Heat  imparted  to  each  pound  of  steam,  from  feed  water 
temperature  to  boiler  pressure. 

a2.  Average  equivalent  rate  of  evaporation  (pounds  of  water 
evaporated,  from  and  at  212°  F.,  per  square  foot  of  heating  sur- 
face, per  hour) . 

a3.  Percentage  of  heat  of  fuel  lost  to  the  stack,  as  shown  by  flue 
gas  temperature  and  analysis. 

a4.  Percentage  of  fuel  lost  to  ash  pit,  as  shown  by  weight  and 
analysis  of  the  ash. 

bl.  Average  load  factor  on  engines  (average  load  divided  by 
rated  capacity). 

It  is  not  claimed  that  the  prime  records,  or  the  auxiliary  and 
principal  statistical  records,  here  presented,  are  complete;  in  the 
first  named,  particularly,  there  is  room  for  extension.  Such 
matters  as  draft  conditions  might  be  noted;  if  there  are,  as  usual, 
several  types  of  engine  in  the  plant,  various  additional  items  of 
information  may  be  needed.  Particulars  as  to  vacuum,  etc., 
would  usually  be  desirable  as  throwing  light  on  variations  in 
engine  efficiency. 

But  we  are  now  studying  not  power-plant  operation,  but 
statistical  records;  and  this  simple  analysis  will  answer  for  its 
purpose.  The  four  principal  records  called  for  show  the  varia- 
tion in  the  vital  figure  we  are  after — the  coal  consumption  per 
unit  of  output — and  the  leading  factors  which  affect  that  figure. 

UNNECESSARY  STATISTICS 

Many  good  managers  would  also  tabulate  a  large  number  of 
additional  observed  or  deduced  facts,  such  as: 

m.  Water  evaporated  per  pound  of  coal. 

n.    Water  evaporated  per  pound  of  coal  from  and  at  212°  F. 

o.    Steam  consumption  per  kilowatt-hour. 

p.  Rate  of  combustion  (pounds  of  coal  burned  per  square  foot 
of  boiler  grate  per  hour) . 

q.  Characteristics  of  coal,  as  to  moisture,  ash,  volatile  matter, 
and  fixed  carbon. 

Of  these  items,  (m)  is  an  indefinite  measure  of  efficiency  and 
n  is  only  another  expression  for  the  "principal  statistical 
record "  (a).  Similarly,  (o)  is  an  alternative  (and  less  definite) 


20 


WORKS  MANAGEMENT 


way  of  stating  the  result  called  for  under  (b).  In  some  cases  the 
record  (p)  may  be  desirable,  either  in  place  of,  or  supplementary 
to  (a2) ;  while  the  items  under  (q)  are  usually  kept  sufficiently 
under  observation  by  occasional  action.  Such  records  as  those 
suggested  by  (m),  (n),  and  (o)  are  clearly  superfluous  and  when 
used  instead  of  (a)  and  (b)  are  usually  employed  merely  because 
of  a  lack  of  sufficient  technical  knowledge  to  make  the  computa- 
tions necessary  for  determining  (a)  and  (b). 

GRAPHICAL  STATISTICS 
Consider  a  statement  like  the  following;: 


STATISTICAL    RECORD    OF   THE   A.  B.  C.  CO.,  FOR  THE   FISCAL 

YEAR  1910-'ll 


Month 

Gross 
earnings 

Operating 
expenses 

Interest  on 
bonds 

Preferred 
stock 
dividend 

Common 
stock 
dividend 

Surplus 

1910 

' 

June  

$100,000 

$112,000 

$12,000  (deficit) 

July  

110,000 

115,000 

5,000   (deficit) 

August.  .  .  . 

165,000 

120,000 

$50,000 

5,000   (deficit) 

September. 

160,000 

125,000 

35,000 

October.  .  .  . 

175,000 

120,000 

55,000 

November. 

130,000 

100,000 

50,000 

20,000 

40,000  (deficit) 

December.  . 

189,000 

110,000 

79,000 

1911 

January  .  .  . 

212,000 

112,000 

100,000 

February..  . 

280,000 

140,000 

50,000 

20,000 

30,000 

40,000 

March  

360,000 

190,000 

170,000 

April  

400,000 

180,000 

220,000 

May  

410,000 

205,000 

50,000 

20,000 

60,000 

75,000 

2,691,000 

1,629,000 

200,000 

60,000 

90,000 

712,000 

The  totals  at  the  foot  of  this  table  are  significant,  but  (to  the 
writer — perhaps  not  to  a  trained  accountant)  the  details, 
without  concentrated  mental  effort,  are  meaningless.  Now  take 
the  accompanying  chart,  which  represents  the  same  figures 
graphically.  We  are  looking,  not  at  a  printed  description,  but 
at  a  picture;  and  the  innate  sense  of  direction,  rather  than  any 
conscious  intellectual  effort,  tells  us  what  happended  to  the 
A.  B.  C.  Co.  during  its  fiscal  year.  Figures  and  chart  both  tell 
the  same  story;  but  the  chart  tells  it  more  quickly  and  clearly. 


STATISTICAL  RECORDS 


21 


Graphical  Statistical  Record  of  the  A.  B.  C.  Co.     For  the  Fiscal  Year  191O-'ll, 


22 


WORKS  MANAGEMENT 


Even  the  chart,  however,  does  not  give  an  ideal  record.  The 
strong  upward  trend  in  gross  earnings  is  evident,  but  it  suggests, 
without  defining,  what  the  year's  gross  earnings  will  be.  The 
surplus  curve  is  highly  irregular,  and  is  necessarily  made  so  by 
the  quarterly  disbursements  for  interest  and  dividends. 

TOTALIZED  CURVES 

Let  us  draw  off  from  the  previous  record  the  following  new 
tabulation: 

STATISTICAL  RECORD  NO.  2 

AVERAGES  PER  MONTH,  FROM  THE  BEGINNING  OF  THE  FISCAL  YEAR  TO  AND 
INCLUDING  MONTH  SPECIFIED 


Month 

Gross 
earnings 

Operating 
expenses 

Interest  on 
bonds 

Preferred 

stock 
dividend 

Common   | 
stock                 Surplus 
dividend 

1910 
June  
July 

$100,000 
105,000 
125,000 
133,750 
142,000 
140,000 
147,000 

155,125 
169,000 
188,100 
207,374 
224,250 

$112,000 
113.500 
115,667 
118,000 
118,400 
115,333 
114,571 

114,250 
117,111 
124,400 
129,455 
135,750 

I 
$12,000 

(deficit) 
(deficit) 
(deficit) 

16,667 

8,500 
7,334 
15,750 
23  600 

August.  .  .  . 
September. 
October  .  .  . 
November. 
December.  . 
1911 
January  .  .  . 
February..  . 
March  
April  
May 

16,667 

3333 

4,667 
32.429 

|  [       "'"" 
i  40,875 

16,667            4444              3333               27,445 
'        63,700 

7fi  Q1Q 

16,667            5000 

7500               59,333 

Chart  2  shows  these  results.  The  irregularities  in  the  "sur- 
plus" curve  are  now  much  less  conspicuous;  they  appear  in 
proper  relation  to  the  year's  business.  It  would  have  been 
equally  satisfactory  to  have  charted  totals  instead  of  averages, 
in  this  particular  instance,  but  the  latter  basis  has  been  adopted 
as  more  nearly  representing  the  method  when  applied  to  the 
graphical  tabulation  of  consumption  records.  These  new  curves 
show  at  any  moment  the  condition  of  things  for  the  expired 
portion  of  the  fiscal  year,  at  the  given  date. 

It  may  be  noted  that,  under  this  present  method,  fluctuations 
will  be  necessarily  more  perceptible  at  the  beginning  of  the  year, 
and  that  they  will  have  less  and  less  influence  on  previous  results 
as  the  months  go  on.  To  remedy  this,  it  might  be  desirable  in 


STATISTICAL  RECORDS 


23 


some  cases  (particularly  with  consumption  records)  to  totalize 
all  figures  for  the  previous  twelve  months,  regardless  of  the  date 
of  beginning  of  the  fiscal  year.  But  with  the  average  manager, 
"last  year"  means  ancient  history.  The  living  present  is  what 
concerns  him;  his  interest  lies  primarily  in  what  is  being  accom- 
plished this  year.  Furthermore,  it  is  useful  in  many  industries 
to  compare  results  in  a  given  month  with  those  of  the  same  month  in 
previous  years;  for  manufacturing  plants  have  their  seasonal 
conditions. 


220,000 
200,000 
180,000 
160,000 
140,000 
120,000 
100,000 
80,000 
60,000 
40,000 
20,000 

> 

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|    |  -|  84    |  '  3    s   S 

Graphical  Statistical  Record  (No.  2)  of  the  A.  B.  C.  Co.     For  the  Fiscal^Year  1910-' 11. 
(Amounts  Totalized  and^Averaged.) 

TOTALIZATIONS  AND  COMPARISONS 

The  following  classes  of  final  records  and  charts  may  then  be 
kept: 

1.  The  chronological,  as  in  the  first  chart,  page  21. 

2.  The  totalized,  from  the  beginning  of  the  fiscal  year,  as  in 
Chart  2. 

3.  The  comparative  chronological,  in  which  figures  for  successive 
months  of  various  years  are  tabulated  on  one  sheet  or  diagram, 
the  same  scales  of  months  and  figures  being  used  for  all  the  years. 


24 


WORKS  MANAGEMENT 


4.  The  comparative  totalized,  like  3,  excepting  that  the  entry 
for  each  month  is  a  total  or  average  figure. 

As  permitting  of  illustrative  examples ,  take  the  set  of  figures 
given  in  the  following  table: 

STATISTICAL  RECORD  OF  THE  A.  B.  C.  CO.  (No.  3) 
OPERATING  EXPENSES 


Months 

Mill  A 

Mill  B 

Total 

1909 

June  

$40,000 

$  10,000 

$50,000 

July  

30,000 

12,000 

42,000 

August  

35,000 

16,000 

51,000 

September  

20,000 

28,000 

48,000 

October  

15,000 

25,000 

40,000 

November  

35,000 

15,000 

50,000 

December  

40,000 

35,000 

75,000 

1910 

January  

40,000 

45,000 

85,000 

February  

45,000 

55,000 

100,000 

March  

50,000 

60,000 

110,000 

April  

55,000 

70,000 

125,000 

May  

50,000 

55,000 

105,000 

June  

50,000 

62,000 

112,000 

July  

60,000 

55,000 

115,000 

August.  .  :  

60,000 

60,000 

120,000 

September  

60,000 

65,000 

125,000 

O3tober  

50,000 

70,000 

120,000 

November  

55,000 

45,000 

100,000 

December 

55,000 

55,000 

110,000 

1911 

January  

50,000 

62,000 

112,000 

February  

60,000 

80,000 

140,000 

March 

75,000 

115,000 

190,000 

April  

80,000 

100,000 

180,000 

May  

80,000 

125,000 

205,000 

From  the  figures  in  the  first  column,  we  derive  solid  lines  which 
form  the  "comparative  chronological"  graphical  record  (No.  3). 
A  "comparative  totalized"  curve  would  be  based  on  the  following 
record  (No.  4)  and  is  also  shown  (dotted)  on  page  25. 


STATISTICAL  RECORDS 


25 


400,000  p 


Graphical  Statistical  Records  (Nos.  3  &  4)  of  the  A.  B.  C.  Co.     Operating  Expenses,  Mill  A 


WORKS  MANAGEMENT 

STATISTICAL  RECORD  OF  THE  A.  B.  C.  CO.  (NO.  4) 
OPERATING  EXPENSES 


Twelve  Months  Ending 

Cost  to  Date,  Mill  A 

1910 
May 

$455  000 

June  

465  000 

July.. 

495  000 

August   . 

520  000 

September 

560  000 

October  

595  000 

November       .       ... 

615  000 

December  

630,000 

1911 
January  

640,000 

Februrary  . 

655  000 

March 

680  000 

April  

705,000 

May.. 

735,000 

In  addition  to  these,  in  a  business  having  several  independently 
operated  plants,  there  is  an  unending  opportunity  for  side-by- 
side  comparisons  of  the  efficiency  of  the  different  mills.  The 
obvious  record  in  this  case  is  that  which  shows  on  one  diagram 
the  chronological  (type  1)  performance  of  all  of  the  mills  with 
respect  to  some  one  particular  feature.  It  is  the  record  numbered 
(3)  adapted  for  several  mills  at  concurrent  time  instead  of  one 
mill  at  various  times. 

CONSUMPTION  TOTALIZATION 
Let  us  assume  this  data: 


Months 

Coal  consumed, 
pounds 

Output,  kilowatt- 
hours 

Pounds  coal  per 
kilowatt-hour 

January  
February  

800,000 
1,200,000 

200,000 
240,000 

4.0 
5.0 

March  
April  

1,400,000 
1,100,000 

350,000 
275,000 

4.0 
4.0 

STATISTICAL  RECORDS 


27 


If  to  these  figures  we  apply  the  method  suggested  under  (2) 
in  the  previous  paragraph,  we  obtain: 


Months 

Coal  consumed 
to  date,  pounds 

Output  to  date, 
kilowatt-hours 

Coal  per  kilowatt- 
hour,  to  date 

January         .... 

800,000 

200,000 

4.0      . 

February 

2,000,000 

440,000 

4.55 

March 

3  400,000 

790,000 

4.3 

April  

4,500,000 

1,065,000 

4.23 

The  figures  in  the  last  column  are  those  significant  to  the 
manager,  and  such  figures  are  typical  of  the  mass  of  detail  found 
in  well-kept  consumption  records.  If  in  the  month  of  May,  the 
load,  in  this  illustration,  fell  off  to  10,000  kw.-hrs.;  the  coal  con- 
sumption might  easily  be  200,000  lb.,  giving  coal  per  kw.-hr.,  20 
Ib. — a  sky-high  figure.  To  know  what  this  really  means  in  the 
year's  business  we  have  only  to  carry  on  our  totalization:  the  coal 
consumed  to  date  becomes  4,700,000 lb.,  the  output  1, 075,000  kw.- 
hrs.,  and  the  consumption  rate  4,700,000-^-1,075,000  =  4.38. 
The  bad  month  has  put  up  the  average  from  4.23  to  4.38.  This 
is  what  we  want  to  know  as  well  as  the  startling  fact  that  the 
consumption  rate  for  that  month  was  20.0.  On  the  other  hand, 
a  good  month,  with  high  production,  improves  efficiency  rates 
more  than  its  own  unit  consumption  figures  alone  would  indicate. 


SPECIAL  RECORDS 

A  striking  modification  of  the  second  of  the  charts  presented 
in  this  chapter  (page  23)  would  be  possible  by  laying  off  down- 
ward from  the  "gross-earnings"  line  successive  distances  repre- 
senting operating  expenses,  interest,  dividends  and  surplus. 
The  point  at  which  funds  became  available  for  dividend  would 
thus  be  clearly  shown. 

A  graph  sometimes  prepared  is  one  showing  the  relation  be- 
tween improvement  expenditures  and  increase  in  gross  earnings. 
If  the  latter  are  laid  off  horizontally,  and  we  assume  (not  an  un- 
common assumption)  that  an  improvement  should  "pay  for 
itself"  in  six  years,  then  the  tangent  of  the  angle  made  by  the 
graph  with  the  horizontal  should  be  6.0. 

Cost  keeping  statistics,   for   completeness,   should   include   a 


28  WORKS  MANAGEMENT 

great  variety  of  factors.  The  statistical  interval  should  be  short 
and  the  tabulations  prompt.  There  is  no  use  in  crying  over  spilled 
milk,  but  quick  action  may  help.  Subdivision  of  data  should 
be  carried  to  the  farthest  possible  extent.  Such  matters  as 
rates  of  wages,  length  of  working  day,  conditions  controlling  the 
cost  of  supplies,  climate,  weather,  rainfall,  etc. — all  of  these  may 
have  to  be  considered  as  secondary  or  subordinate  data  in  the 
general  analysis:  and  the  raw  material  for  such  data  should  be 
kept  at  hand. 


CHAPTER  IV 
LABOR 

Practically  speaking,  all  costs  in  industrial  production  are 
ultimately  labor  costs.  The  vital  problem  in  management  is 
the  reduction  of  labor  cost,  or,  to  put  it  in  a  phrase  probably 
more  acceptable  to  many  people,  it  is  the  increase  of  human 
productiveness,  which  may  either  reduce  the  average  length  of 
the  working  day  (to  5  or  6  hours,  as  some  think)  or,  by  decreasing 
commodity  values  generally,  elevate  the  standard  of  living. 
Not  only  from  this  standpoint,  however,  is  a  high  labor-hour 
production  desirable:  the  fixed  costs  of  maintaining  a  manufac- 
turing plant — such  as  rent,  taxes,  and  the  like — are  so  great  that 
in  order  to  keep  them  low  per  unit  of  output,  the  output 
must  be  high.  Efficiency  in  workmanship  is  in  a  large  proportion 
of  works  less  important  in  itself  than  in  its  effect  on  the  rate  of 
fixed  cost.  In  order  to  secure  this  last  beneficial  effect  it  is 
sometimes  (if  not  usually)  even  permissible  to  increase  the  labor 
cost  rate. 

Without  supervision  and  the  spur  that  supervision  gives,  men 
degenerate  in  productiveness.  There  is  an  innate  tendency 
toward  inefficiency  that  must  be  checked  by  special  means. 
Such  a  tendency,  during  the  early  part  of  the  present  generation, 
had  shown  pronounced  results  in  the  great  majority  of  engineer- 
ing workshops.  The  powerful  stimulus  which  is  now  being- 
applied  to  offset  it  had  its  origin  in  the  apparently  unrelated 
factor,  the  introduction  of  improved  tool  steels. 

The  " self-hardening"  or  "high  speed"  steels  have  had  two 
curious  effects.  In  the  first  place,  they  have  compelled  the  re- 
design of  practically  all  of  our  machine  tools.  The  old  machines 
were  too  light  to  stand  the  heavy  cuts  and  feeds  which  the  new 
tool  steels  invited.  Secondly,  the  new  steels  have  afforded  the 
opportunity  for  an  increase  of  two  to  four  times  in  the  speed  of 
cutting  metals. 

This  increased  machine  tool  production  has  in  a  subtle  way 
been  associated  with  a  general  increase  (where  proper  methods 

29 


30  WORKS  MANAGEMENT 

have  been  applied)  in  labor  efficiency.  Men  have  not  only  turned 
out  three  times  the  former  amount  of  work  in  a  lathe  or  planer; 
they  have  learned  how  to  triple  their  production  in  operations 
where  no  improved  steels  were  available,  in  such  work  as  shovel- 
ing, moving  materials,  etc. 

LABOR  COST  APPORTIONMENT 

Some  trouble  and  expense  are  necessary  in  order  to  learn  the 
correct  distribution  of  labor  costs  in  a  plant  making  a  diversified 
output.  Apparently,  no  invoices  are  received  for  labor,  yet  in 
reality  the  pay  roll  is  an  invoice  which,  like  any  other,  must  be 
classified  in  two  ways.  Its  payment  must  be  recorded  as  squar- 
ing accounts  with  its  maker — the  workman,  and  also  as  against 
some  specific  item  of  production. 

A  magazine  article1  describes  the  system  employed  at  the  Lynn 
works  of  the  General  Electric  Company,  where  some  5000  articles 
are  made.  Here  about  one-third  of  the  employees  are  on  day 
work,  two-thirds  on  piece  work.  For  the  various  operations 
involved  in  constructing  and  assembling  the  5000  items  of  pro- 
duction, there  exist  some  20,000  piece  work  standard  schedule 
rates. 

The  result  of  the  system  to  be  described  is  such  that  within  a 
day  or  two  after  the  pay-roll  period  the  manager  knows  the  exact 
distribution  of  the  $150,000  weekly  labor  expense. 

No  man  employed  works  an  hour  of  time  excepting  under  the 
authority  of  a  numbered  shop  order.  Some  of  these,  as  for  "  ex- 
pense" labor,  are  standing  orders;  the  great  majority  are  issued 
as  occasion  requires.  Every  shop  order  number  includes  six 
digits.  The  first  of  these  refers  to  the  general  classification: 
1.  production,  2.  construction  (about  the  works),  3.  repairs 
(made  for  customers),  4.  expense,  5.  experimentation,  6.  engineer- 
ing and  designing.  The  second  and  third  digits  describe  one  of 
the  50-odd  classification  subdivisions,  while  the  last  three  spe- 
cifically describe  type,  size,  finish,  etc. 

Thus,  order  127436  might  refer  to 

1.  Production. 

27.  Enclosed  arc  lamp. 

4.  220  volt.  d.  c.  type. 

3.  2.8  amperes. 

6.   Black  japanned  finish. 

1  The  Engineering  Magazine,  March,  1908. 


LABOR  31 

The  shop  orders  containing  this  number  are  each  a  direction 
to  some  one  workman  to  do  some  one  thing  necessary  for  the  pro- 
duction of  such  enclosed  arc  lamps.  They  contain,  besides  the 
shop  order  number,  the  workman's  number,  the  date,  a  brief 
statement  of  what  is  to  be  done,  with  blue  prints  and  specifica- 
tions attached  if  necessary,  and  a  signature. 

The  "  invoices"  for  labor  are  of  two  kinds:  the  time  card  and  the 
piece  work  slip.  Each  originates  with  the  employee  to  be  paid. 
The  clay  worker  writes  on  his  time  card  the  number  of  hours  spent 
on  each  shop  order,  signing  his  name  or  number.  The  piece 
worker,  in  the  same  way,  signs  a  statement  of  the  number  of 
pieces  made  and  the  appropriate  piece  work  schedule  number, 
for  each  shop  order  on  which  he  has  worked. 

These  two  forms  are  of  course  arranged  for  necessary  checking 
and  clerical  entries.  They  then  go  to  the  paymaster's  depart- 
ment, where  they  are  grouped  by  workmen's  numbers,  and  the 
amount  due  each  man  is  computed.  Next  they  pass  to  the  cost 
department,  where  they  are  arranged  in  order  of  shop  order 
numbers,  each  of  which  will  require,  on  the  average,  200  cards, 
about  1000  separate  shop  orders  being  current  in  an  average 
week.  The  cost  department  then  draws  up  a  statement  showing 
for  each  shop  order  number  the  expenditure  for  both  day  work 
and  piece  work.  Summaries  are  made  for  various  groups  of 
output,  and  the  final  summary  appears  on  a  slip  the  size  of  a 
visiting  card,  in  the  following  form: 

WEEK  ENDING  MAY  31,  1907 

Production 65.09  per  cent. 

Construction 11 .81  per  cent. 

Repairs 6 . 50  per  cent. 

Expense 8 . 40  per  cent. 

Experimentation 4. 10  per  cent. 

Engineering 4.10  per  cent. 


100,00  per  cent. 

The  slightest  variation  of  these  percentages  from  normal  may 
be  investigated  by  referring  to  the  itemized  figures  in  the  cost 
department. 

This  system  shows  the  cost  of  labor  for  producing,  say  a  shop 
lot  of  100  lamps,  but  not  necessarily  the  cost  of  labor  for  the  27 
lamps  which  may  have  been  purchased  by  John  Smith  of  Buffalo. 
That  is,  costs  are  not  determined  for  individual  customer's  orders, 


32  WORKS  MANAGEMENT 

nor  is  it  necessary  that  they  should  be,  when  the  lamps  sold 
to  Smith  are  precisely  the  same  as  hundreds  of  lamps  sold 
elsewhere. 

But  where  a  less  standardized  product — say  large  steam 
engines — is  being  made,  costs  will  vary  even  on  two  precisely 
duplicate  items  of  product;  and  in  such  cases  the  record  is  some- 
times kept  for  individual  customer's  orders.  No  additional 
complication  is. involved,  excepting  possibly  two  or  three  more 
digits  on  the  shop  order  number. 

SYSTEMS  OF  PAYING  LABOR 

The  most  common  method  of  purchasing  labor  is  by  the  unit 
of  time;  in  the  lower  grades,  by  the  hour.  The  higher  in  the 
scale  of  life  the  laborer  stands,  the  longer,  generally  speaking, 
is  his  wage  interval:  the  ditcher  is  paid  by  the  hour,  the  book- 
keeper by  the  week,  the  engineer  perhaps  by  the  month,  the  man- 
ager possibly  (nominally)  by  the  year;  and  with  this  increasing 
wage  period  there  goes  an  increasing  lack  of  relation  between  the 
number  of  hours  worked  and  the  rate  of  compensation,  the 
assumption  being,  apparently,  that  the  higher  grade  workman 
may  be  depended  upon  to  consider  rather  the  doing  of  his  work 
well  than  the  time  he  spends  on  it. 

When  we  pay  a  man  by  the  hour,  we  virtually  assume  that 
it  is  his  time  that  is  of  value  to  us,  although  this  is  in  very  few  in- 
stances the  actual  case.  The  day  wage  system  is  contrary  to 
human  nature.  It  encourages  the  man  to  husband  his  strength 
either  for  his  amusements  or  that  he  may  not  exhaust  his 
market ;  and  it  encourages  the  master  to  drive  the  man  regard- 
less of  humanitarian,  sociological  or  even  higher  economic 
considerations. 

Piece  work  is  diametrically  opposed  to  this.  Here  we  pay  the 
man  for  what  he  produces,  regardless  of  the  time  he  spends  in 
producing  it.  Under  piece  work,  the  relation  of  master  and  man 
ceases,  and  there  is  substituted  the  relation  of  two  parties  to  a 
business  transaction.  The  interest  of  the  workman  should  now 
be,  the  highest  rate  of  production  possible. 

The  interest  of  the  employer  is  more  difficult  to  define:  and 
here  lies  the  whole  explanation  of  the  failure  of  piece  work  in 
practice.  Piece  work  was  originally  introduced  solely  as  a 
method  for  reducing  labor  costs.  In  order  that  piece  work 


LABOR  33 

might  be  attractive  to  the  man,  it  had  to  increase  his  earnings. 
In  order  that  it  might  interest  the  employer,  it  had  to  reduce  the 
labor  cost  to  him  per  piece  produced.  When  it  did  both  of  these 
things  it  demonstrated  conclusively  past  bad  management. 

For  example,  a  man  made  20  bolts  in  a  day,  receiving  the  day- 
work  wage  of  $2.00,  equivalent  to  a  cost  per  bolt  of  10  cents. 
Put  on  piece  work,  at  a  rate  of  8  cents,  he  produced  30  bolts  per 
day,  making  his  wage  $2.40.  The  man  was  satisfied,  and  the 
employer  should  have  been.  But  after  a  time  the  man  unwisely 
allowed  his  production  to  increase  to  50  bolts  per  day,  bringing 
in  for  him  $4.00. 

Then  the  employer  felt  this  to  be  too  high  a  wage  for  a  man  of 
this  class;  he  reasoned  that  if  the  man  could  produce  50  bolts  a 
day  he  must  have  been  '  'soldiering "  frightfully  in  the  past  when 
his  regular  day's  output  was  only  20  bolts.  Acting  on  resent- 
ment and  greed,  he  cut  the  piece  work  rate  to  6  cents. 

The  workman  now  finds  himself  obliged  to  turn  out  33  bolts 
daily — 70  per  cent,  more  than  his  former  day's  work  output — in 
order  to  make  his  former  day-wage.  At  maximum  effort,  he  can 
make  only  $3.00  a  day.  He  concludes  that  piece  work  is  bad; 
that  it  has  increased  his  burden  70  per  cent.,  an  evil  not  to  be 
offset  by  the  possibility  of  somewhat  higher  earnings  than  the 
old,  on  condition  of  the  most  strenuous  exertion;  a  possibility 
which,  moreover,  he  feels  may  at  any  time  disappear. 

If  we  analyze  this  unfortunate  state  of  affairs,  we  find: 

(a)  The  original  piece  work  price  of  8  cents  was  a  mere  guess; 
if  the  man  was  capable  of  making  50  bolts  a  day,  and  the  manager 
had  known  it,  the  latter  would  probably  never  have  agreed  to 
such  a  price  as  he  did  agree  to. 

(b)  The  employer  was  shortsighted  in  losing  sight  of  the  fact 
that  a  production  of  50  bolts  per  day,  even  at  8  cents,  was  profita- 
ble to  him  from  the  standpoint  of  fixed  charge  reduction  as  well 
as  from  the  labor  cost  standpoint. 

(c)  The  workmen  must  have  been  cheating  the  employer  in  the 
past. 

(d)  The  employer  must  have  been  a  poor  manager  not  to  have 
found  this  out. 

These  considerations  will  serve  to  introduce  what  may  be 
described  in  general  as  "profit-sharing"  systems  of  wage  pay- 
ment: systems  which  differ  from  strict  piece  work  psychologically 
rather  than  in  essence. 

3 


34  WORKS  MANAGEMENT 

PROFIT-SHARING1 

A  major  premise  of  the  profit-sharing  advocates  is  that  the 
average  man,  under  old  style  management,  does  about  one- 
third  as  much  as  he  might  do:  a  premise  which  the  present  writer 
is  on  the  whole  prepared  to  endorse.  The  difference  in  produc- 
tiveness of  the  average  man  and  the  first-class  man,  working 
under  proper  conditions,  is  simply  tremendous.  In  order  to 
triple  present  production,  modern  management  proposes: 

(a)  To  furnish  the  workman  with  an  ample  supply  of  tools 
scientifically  correct. 

(b)  To  furnish  such  jigs,  fixtures  and  general  facilities  as  will 
most  expedite  the  work. 

(c)  To  supply  the  proper  kinds  and  amounts  of  material  at  the 
exactly  proper  times  and  places. 

(d)  To  give  expert  instruction  in  methods  and  processes;  these 
instructions  to  be  as  detailed  and  as  much  matters  of  course,  as 
the  drawings  issued  by  the  designing  engineers. 

(e)  To  scientifically  determine  under  the  foregoing  conditions, 
what  production  the  man  should  attain;  and,  finally, 

(f)  To  reward  the  man  in  proportion  to  his  degree  of  attain- 
ment of  this  ideal  standard. 

The  standard  of  production  fixed  under  (e)  is  never  to  be 
changed  unless  standard  methods,  tools  or  processes  are  changed. 
Here  is  the  sharp  contrast  with  pure  piece  work.  The  standard 
of  production  with  the  latter  was  established  by  a  guess  (usually 
based  on  the  workman's  previous  performance),  and  the  employer 
demanded  the  privilege  of  making  repeated  guesses.  Under  the 
profit-sharing  systems,  the  aim  is  that  this  standard  shall  be 
accurately  ascertained;  if  it  is  not,  these  systems  lose  one  of  their 
psychological  advantages  over  piece  work.  Not  the  whole 
advantage,  however,  for  in  the  very  process  of  setting  the  stan- 
dard rate  the  employer's  attention  will  have  been  caused  to  dwell 
on  the  momentous  question  of  fixed  charges.2 

As  an  example,  suppose  the  fixed  charges,  reduced  to  their 

1  This  phrase  is  here  used  in  a  sense  technically  incorrect:  not  to  describe  those  philan- 
thropic and  paternal  schemes  exemplified  by  the  employees'  stock-sharing  scheme  of  the 
United  States  Steel  Corporation,  but  (in  default  of  a  generic  word)  as  covering  all  forms  of 

'bonus,"  "premium"  or  "efficiency"  systems  of  wage-payment. 

2  But  it  may  as  well  be  remarked  here  that  in  the  writer's  opinion   the  profit-sharing 
systems  are  weak  in  their  psychological  foundation.     Unlike  a  steam  engine,  a  man  has  no 
clearly  defined  maximum  efficiency.     We  can  never  safely  predict  what  a  human  being  can 
do.     Proposition  (e)  seems  therefore  one  that  cannot  be  definitively  realized. 


LABOR  35 

proportion  per  employee,  to  amount  to  $4.00  per  day:  the  work- 
man producing,  under  day  work,  20  bolts,  with  a  wage  of  $2.00. 
The  total  cost  per  bolt  is  30  cents.  On  piece  work  at  an  8-cent 
rate  and  a  production  of  30  bolts,  the  fixed  charges  are  still  $4.00, 
the  workman  is  paid  $2.40,  and  the  cost  per  bolt  is  21.3  cents. 
Both  man  and  employer  should  be  satisfied. 

Now,  as  in  the  previous  illustration,  suppose  the  workman  to 
produce  50  bolts  in  a  day,  for  which  he  receives  $4.00.  The  total 
cost  of  $8.00  per  day  now  amounts  to  16  cents  per  bolt.  Appar- 
ently both  man  and  employer  should  be  better  satisfied  still. 
And  so  they  should  be;  so  perhaps  they  would  have  been  if  both 
had  looked  at  the  subject  in  all  of  its  bearings.  But  since  piece 
work  is  supposed  to  be  a  labor  saving  device,  the  exorbitant  type 
of  employer  cuts  the  rate  to  6  cents,  making  the  total  cost  per 
bolt  (with  a  50  bolt  daily  production),  14  cents.  He  has  thus 
made  a  little  further  gain — but  he  has  probably  killed  the  goose 
that  laid  the  golden  egg;  and  piece  work  falls  into  disrepute. 

The  employer  could  in  reality  have  well  afforded  to  pay  a  rate 
equivalent  to  the  old  day  labor  cost  of  10  cents  per  bolt;  this 
would  have  led  to  the  following  results: 

Total  cost, 

Daily  production      Paid  to  workman  j    including  fixed    !   Cost  per  bolt 

charges 


20  (day  work)  

| 
$2.00 

$6.00 

30         cents 

30  

3.00 

7.00 

23  1/3  cents 

40  

4.00 

8.00 

20          cents 

50  

5.00 

9.00 

18         cents 

On  this  basis  the  workman  would  have  had  no  possible  ground 
for  complaint.  The  trade  union  might  have  had,  if  it  were  one  of 
those  unions  which  preach  the  restriction  of  production;  this  is  a 
matter  which  must  be  looked  into  in  detail  presently.  The 
employer,  on  the  other  hand,  should  have  no  fault  to  find. 
True,  the  workman  is  getting  full  benefit  from  an  increased  pro- 
duction toward  which,  at  some  pains  and  expense,  the  employer 
has  provided  the  incentive.  The  former  is  not,  perhaps,  entitled 
to  all,  and  the  profit-sharing  systems  undertake  to  decide  what 
part  he  is  entitled  to;  but  the  figures  show  that  as  compared  with 
day  work,  in  cases  where  fixed  charges  are  a  serious  factor,  the 


36  WORKS  MANAGEMENT 

employer  would  profit  richly  even  if  he  had  to  give  the  workmen 
all. 

There  is  here,  then,  a  gain  due  to  the  incentive  provided;  a 
gain  due  to  the  extra  effort  of  the  workman;  and  a  third  gain, 
working  while  all  parties  sleep — almost — in  the  reduced  rate  of 
fixed  charge. 

THE  HALSEY  PREMIUM  SYSTEM 

This  is  perhaps  the  oldest  of  the  accepted  plans  of  profit- 
sharing.  It  is  the  one  probably  in  most  general  use  in  machine 
shops.  The  workman  is  guaranteed  his  full  day  wage,  regardless 
of  production.  Under  the  piece  work  system  first  described,  if 
a  man  produced  20  bolts  (as  under  day  work)  he  earned  only 
$1.60  instead  of  his  former  $2.00.  Under  the  Halsey  system  he 
would  still  get  the  $2.00.  Thus  far,  the  plan  gives  a  sop  to  the 
laborer  and  thus  disposes  of  one  of  the  more  elementary  objec- 
tions to  piece  work. 

But  now,  suppose  the  man  to  produce  30  bolts  in  a  day. 
Under  the  old  day  work  basis,  this  would  have  required  1  1/2 
days.  If  paid  at  a  piece  rate  equivalent  to  the  former  day  rate, 
he  would  receive  $3.00  for  his  day's  work.  He  has  saved  half  a 
day  as  compared  with  his  former  record.  Under  the  Halsey  plan, 
he  is  now  paid  one-third  (or  generally  from  25  to  50  per  cent.)  of 
the  value  of  what  he  has  saved,  i.e.,  for  1/6  day's  time;  or  33  1/3 
cents,  as  a  premium,  making  his  compensation  for  the  day 
$2.33  1/3. 

Two  points  should  be  noted;  the  basis  on  which  the  bonus  is 
computed  is  the  previous  record  of  the  man;1  and  the  saving  in 
time  is  so  divided  that  the  employer  and  the  employee  each  get  a 
share.  As  to  the  first  point,  there  is  no  reason  why  the  standard 
performance  should  not  be  based  on  a  scientific  study,  as  in  more 
fully  developed  systems.  If  this  were  the  case,  the  system  would 
be  more  satisfactory.  As  to  the  division  of  profits,  no  hard  and 
fast  rule  can  be  laid  down.  Under  piece  work,  the  employee 
gets  all  of  the  benefit  from  the  time  saved,  although  to  accomplish 
this  saving  he  has  driven  machines  harder,  consumed  more 
power,  etc.  It  would  seem  that  the  employer  is  entitled  to  part 

1  Previous  records  are  regarded  in  much  the  same  way  as  athletic  records.  It  would 
probably  be  safe  to  assume  that  no  man  in  the  world  could  run  a  hundred  yards  in  much  less 
than  ten  seconds! 


LABOR 


37 


of  the  benefit;  and  by  giving  him  a  part  we  reduce  his  temptation 
toward  a  cutting  of  rates. 

How  this  principle  works  out  may  perhaps  be  shown  more 
clearly  by  the  following  figures : 


Daily 
production 

Time  saved,  based 
on  a  normal  pro- 
duction    of     20 
bolts  per  day 

Workman's 
share 
of 
time  saved 

Workman's 
wage 

Workman's 
wage  per 
bolt 

Total 
cost  per 
bolt* 

10 

$2.00 

20  cents 

60  cents 

20             j  

2.00 

10  cents 

30  cents 

30 

i 

$.33* 

2.33£ 

7.8  cents 

21.1   cents 

40                             1                              .66| 

2.66§ 

6.7  cents 

16.7  cents 

50 

H 

1.00 

3.00 

6.0  cents 

14  cents 

We  here  note  that  the  workman's  daily  wage  steadily  increases 
as  his  production  increases,  though  not  as  rapidly  as  under  a 
pure  piece  work  rate,  because  the  wage  per  bo^t  steadily  decreases 
as  the  production  increases.  The  total  cost  per  bolt  (the  thing 
that  concerns  the  employer)  also  steadily  decreases.  These 
features  are  not  peculiar  to  the  2:1  division  of  profits;  they  are 
characteristic  of  the  system  for  all  possible  ratios  of  division. 

The  gist  of  the  matter  lies  here.  It  is  the  interest  of  the 
employer  that  the  total  cost  per  bolt  shall  be  a  minimum;  there- 
fore, also,  that  the  number  of  bolts  produced  shall  be  a  maximum. 
Is  the  incentive  toward  maximum  production  sufficient  when  the 
workman  receives  less  per  piece,  the  more  he  produces?  In 
many  cases,  no;  but  no  absolute  answer  can  be  given,  because  it 
is  the  day's  earnings  which  after  all  count  with  most  men.  Yet 
it  seems  hard  task-mastery  to  bait  men  on  to  efforts  continually 
more  strenuous  and  as  continually  less  profitable.3 

1  Fixed  charges  constant  at  $4.00  per  day. 

2  The  Halsey  plan  makes  no  pretence  to  a  "scientific"  character  in  the  current  sense.     No 
standard  methods  are  contemplated ;  the  workman  is  left  undisturbed  to  increase  his  pro- 
ductiveness in  his  own  way.     The  system  may  be  introduced  with  practically  no  friction  or 
disturbance. 

In  Rowan's  modification  of  the  Towne-Halsey  system,  provision  is  made  that  the  work- 
man shall  be  unable  under  any  circumstances  to  more  than  double  his  earnings.  Thus,  let 
A  be  the  standardized  timefora  job,  B  the  time  actually  consumed  by  the  man:  then  the  per- 
centage of  time  consumed  for  which  the  workman  is  paid  a  premium  is 


if  B  =  A/2,  he  is  paid  a  premium  for  half  the  time  consumed,  so  that  his  hourly  rate  increases 
50  per  cent.;  if  B  =  A/4,  his  hourly  rate  increases  75  per  cent.;  but  it  can  never  increase  to 
more  than  double.  If  B  =  A,  there  is,  of  course,  no  premium. 


38 


WORKS  MANAGEMENT 
THE  DIFFERENTIAL  PIECE  RATE  SYSTEM 


To  bring  this  point  out  clearly,  let  us  consider  a  system  in 
which  because  of  high  fixed  charges  (due  to  the  use  of  expensive 
machinery)  it  is  profitable  not  merely  to  keep  up  the  wage  per 
piece,  but  actually  to  increase  it  as  the  production  increases. 
Here  we  have  a  differential  piece  rate  system  in  which  the  work- 
man is  given  the  value  not  only  of  all  the  time  he  saves,  but  more. 

Let  the  day's  production  be  standardized  at  20  bolts,  the  day 
wage  be  $2.00,  and  the  compensation  adjusted  so  that  the  man  is 
given  11/2  times  the  value  of  the  time  he  saves:  fixed  charges 
applicable  being  in  this  case  $12.00  per  day.  We  then  have: 


Time  saved,  based 

Workman's 

Cost  per  bolt, 

Daily 

on  a  normal  pro- 

compensation 

Workman's 

Wage  per 

including 

production 

duction     of     20 

for 

wage 

bolt 

fixed  charges 

bolts  per  day 

time  saved 

10 

$2.00 

0.20 

$1.40 

20 

2.00 

0.10 

0.70 

30 

} 

i  =  $1.50 

3.50 

0.11§ 

0.51§ 

40 

1 

H=   3.00 

5.00 

0.12* 

0.42* 

50 

1* 

2J=   4.50 

6.50 

0.13 

0.37 

. 

Here  the  workman's  wage  per  day  runs  very  high,  because  his 
wage  per  piece  increases  with  his  production.  His  recompense 
varies  not  directly,  but  as  some  power  of  his  productivity. 
Meanwhile  the  cost  to  the  employer  per  piece  steadily  decreases. 
Under  the  Halsey  system,  as  previously  described,  it  would  have 
been  about  30  cents,  instead  of  the  37  cents  here  tabulated,  for 
a  production  of  50  bolts  per  day.  It  is  a  fair  question  whether 
under  the  assumed  conditions  a  50-bolt  daily  production,  with 
the  accompanying  differential  rate  wage  of  $6.50  would  not 
be  far  more  likely  of  realization  than  a  40-bolt  production  at  a 
Halsey  wage  of  $2.66  2/3.  The  total  cost  per  bolt  would  be 
about  37  cents  in  either  case. 

Suppose  such  production  to  represent  so  high  an  attainment 
that  only  the  best  men,  under  the  inspiration  of  the  highest 
incentive,  will  reach  it.  The  incentive  of  a  day's  wage  of  $6.50 
may  be  assumed  to  be  just  sufficient.  Suppose  also  that  under 
the  much  lower  wage  scale  of  the  Halsey  system  the  production 
reached  was  only  30  bolts  per  day,  at  which  the  day's  wage 
would  be  $2.33  1/3  and  the  total  cost  per  bolt  48  cents,  nearly. 


LABOR  39 

The  employer  would  be  much  worse  off,  obviously,  than  if  he  had 
paid  $6.50  as  the  day's  wage  and  in  so  doing  have  reached  the 
total  unit  cost  of  37  cents.  The  workman  is  worse  off  by 
$4.16  2/3  per  day  than  he  would  have  been  under  the  differential 
piece  rate;  but  he  had  no  opportunity  at  this  rate;  his  loss,  as  he 
views  it,  is  merely  the  difference  between  $3.00 — the  maximum 
under  the  Halsey  system— and  $2.33  1/3,  or  66  2/3  cents,  a  loss 
which  he  may  regard  as  endurable  since  he  works  only  60  per 
cent,  as  hard  as  he  would  have  to  work  to  eliminate  it. 

Based  on  the  figures  selected,  then,  the  employer  must  decide 
whether  he  will  pay  the  workman  $6.50  per  day  instead  of 
$2.33  1/3,  in  order  to  secure  a  unit  cost  of  37  cents  instead  of  48 
cents,  Will  he  give  the  man  $4.16  2/3  in  order  that  he  may  save 
$5.50  over  and  above  what  he  gives  the  man?  Most  people 
would  if  they  approached  the  subject  in  a  cool  and  rational 
manner,  but  of  course  the  proportion  of  fixed  charges  has  in  this 
illustration  been  purposely  made  high. 

The  characteristic  of  the  differential  rate  system  (introduced 
by  Mr.  F.  W.  Taylor)  as  thus  illustrated,  is  the  existence  of  two 
(or  more)  distinct  piece  rates.  (Mr.  Taylor  uses  only  two.)  The 
low  rate  is  paid  for  low  production,  the  high  rate  for  high  pro- 
duction. This  is  the  directly  opposite  plan  to  that  of  Mr.  Halsey. 
In  the  absence  of  a  guaranteed  daily  wage — a  characteristic  not 
shown  by  the  tabulation — the  differential  plan  also  differs  from 
Mr.  Halsey's.  It  gives  the  workman  more  than  his  "share"  of 
the  benefit  from  increased  production.  In  the  table,  for  example, 
an  increase  in  production  of  25  per  cent,  (from  40  to  50  bolts  per 
day)  raises  the  daily  wage  $1.50  or  30  per  cent. 

THE  GANNT  BONUS  PLAN 

Thus  far  the  workman's  additional  compensation  has  come  to 
him  as  a  payment  for  time  saved,  bearing  some  relation  to  the 
amount  of  time  saved.  In  the  Gannt  bonus  system,  the  reward 
on  the  contrary  took  the  form  of  a  definite  prize  for  a  definite 
achievement.  This  system  was  perhaps  the  first  (of  those  now 
under  general  discussion)  in  which  an  earnest  effort  was  made 
to  determine  how  much  time  a  job  should  take,  regardless  of 
previous  average  performances.  The  same  effort  is  made,  how- 
ever, in  the  more  recently  discussed  differential  rate  system. 

Suppose  the  day-worker  producing  20  bolts  at  a  daily  wage  of 


40 


WORKS  MANAGEMENT 


$2.00  to  be  put  under  scientific  observation,  as  a  result  of  which 
it  is  concluded  that  a  proper  day's  production  is  30  bolts.  He  is 
now  offered  a  bonus,  which  may  be  any  sum  of  money  whatever, 
under  the  condition  that  he  produce  30  bolts.  If  he  produce  29, 
he  receives  his  hourly  wage,  but  no  bonus.1  If  he  produce  50 
(which  is  unlikely,  because  careful  study  has  shown  a  production 
of  30  bolts  to  represent  genuinely  good  work),  he  receives  the 
standard  bonus,  but  no  more.  Let  the  bonus  be  $1.002  and  the 
fixed  charges  $4.00  per  day,  giving  the  following  results: 


Daily 
production 

Bonus 

Workman's         Wage  per           Total  cost  per 
wage            piece,  cents           piece,  cents 

1 

10 

$2.00                     20 

60 

20 

2.00                     10 

30 

30 

$1.00               3.00 

10 

23^ 

40                    1.00    !            3.00 

7* 

m 

50                    1.00 

3.00 

6 

14 

The  bonus  system  is  claimed  to  be  one  that  can  be  readily 
introduced  without  friction,  particularly  (when  the  bonus  is 
fairly  high)  as  a  step  forward  from  piece  work.  An  essential 
feature  is  that  standard  methods  and  instructions  are  provided 
so  that  the  workman  may  feel  that  he  is  being  helped  to  earn  his 
bonus.  These  may  cause  friction.  The  piece  work  pitfall — 
excessive  earnings  by  the  workman — is  avoided.3 

But  the  plan  discourages  individuality.  The  workmen  are 
grouped  into  two  grades  only,  the  bonus-earners  and  the  non- 
bonus-earners.  There  is  no  opportunity  for  each  man  to  do  his 
individual  best,  no  premium  on  distinction,  no  reward  for  the 
passably  good  man.  The  Halsey  and  Gannt  plans  are  in  this 
respect  diametrically  opposed. 

These  defects  may  be  in  part  remedied  by  the  device  of  '  'stand- 
ard time."  Instead  of  standardizing  production  at  30  bolts  per 
day,  we  will  standardize  time  at  the  equivalent:  1/30  day  per 

1  The  present  day's  wage  is  guaranteed. 

2  The  bonus  usually  ranges  between  20  and  50  per  cent,  of  the  previous  day's  wage. 

3  Curiously  enough,  it  is  claimed  that  a  change  in  standard  rates  under  the  Gannt  system 
is  possible  without  the  disturbance  which  such  a  change  is  sure  to  create  in  a  piece  work 
shop.     The  Gannt  standard  is  a  time  rate,  so  that  when  a  change  is  made  it  is  technically  one 
in  time,  not  directly  one  in  money. 


LABOR  41 

bolt.  Let  us  agree  to  pay  the  workmen  1/30  of  a  day's  wages — 
62/3  cents — for  every  bolt  he  produces,  providing  he  produces  30 
in  a  day.  The  system  then  becomes  pure  piece  work  excepting 
for  its  minimum  provision — the  production  of  30  bolts  per  day; 
and  since  the  presence  of  any  man  who  produced  less  would  be 
unsatisfactory  to  both  man  and  employer,  such  men  would  soon 
be  weeded  out  and  the  system  would  become  piece  work  pure  and 
simple. 

The  bonus  system  is  frequently  applied  to  gang  work,  where 
the  men  (and  often  their  foreman  as  well)  receive  a  bonus  con- 
ditionally upon  the  completion  of  the  prescribed  gang  task 
within  the  standard  time.  The  contract  system,  found  in  large 
works,  involves  either  a  gang  piece  rate  or  a  gang  bonus.  Even 
the  higher  shop  officers  are  in  some  plants  given  a  bonus  as  a  re- 
ward for  realization  of  some  set  standard  of  performance  by  the 
whole  department  or  works.  A  contract  rate  may  be  accompa- 
nied by  piece  work  or  bonus  rates  for  the  men  working  under  the 
contractor;  or  their  men  may  be  straight  day  workers,  having  no 
share  in  the  profits  which  the  contractor  derives  from  their  labor. 

THE  EMERSON  "EFFICIENCY"  SYSTEM 

This  last  of  the  systems  is  a  development  from  both  the  bonus 
and  the  premium  plans;  combining  good  elements  of  both,  and 
recognizing  the  human  element  by  giving,  within  reason,  a 
tempting  incentive  to  every  man  to  do  his  personal  best.  Mr. 
Going  has  given  the  striking  illustration  which  compares  the 
Halsey  plan  with  an  inclined  plane,  that  of  Gannt  with  a  preci- 
pice up  which  the  workman  must  jump,  and  that  of  Emerson 
with  a  hill  of  gradually  increasing  steepness. 

The  "efficiency"  scheme  may  be  illustrated  from  the  same 
data  as  the  other  systems:  day  wage  $2.00,  production  20  bolts, 
fixed  charges,  $4.00.  Let  the  standard  production  be  set  at  30 
bolts  (  =  100  per  cent,  efficiency)  for  which  a  20  per  cent,  bonus 
(40  cents)  is  given.  For  a  production  of  27  bolts  (27/30-0.90 
efficiency),  the  bonus  will  be  10  per  cent.,  or  20  cents;  for  24 
bolts  (24/30  =  0.80  efficiency),  it  will  be  3  1/4  per  cent,  or  6  1/2 
cents;  falling  to  no  bonus  at  66  2/3  per  cent,  efficiency  or  a 
20-bolt  daily  production.  (A  curve  is  plotted  to  show  the  rate 
of  bonus  for  each  rate  of  production.)  The  present  daily  wage 
is  guaranteed.  For  an  efficiency  of  120  per  cent.  (36  bolts  per 


42 


WORKS  MANAGEMENT 


day),  the  bonus  is  40  per  cent. — 80  cents — and  so  on:  the  higher 
the  efficiency,  the  higher  the  bonus.  This  leads  to  the  following 
results : 


Daily 
production 


Daily 
wage 


Wage  per 
piece,  cents 


Total  cost  per 
piece,  cents 


Efficiency 


20 
24 
27 
30 
36 


$2.00 


2.20 
2.40 

2.80 


10 
8.6 
8.1 
8 

7.8 


30.0 
25.2 
23.0 
21.3 
19.0 


0.6667 

0.8 

0.9 

1.0 

1.2 


Here  the  equivalent  piece  rate  falls  off  somewhat  as  production- 
increases;  the  total  cost  per  piece  might  be  reduced  even  if 
no  such  falling  off  were  contemplated. 


£32 

2™ 


20 
33 

10 
12 


A 


7 


Efficiency,  Per  Cent 
Relation  Between  Bonus  and  Efficiency. 


REMARKS 

In  all  of  the  systems,   excepting  the  pure  differential,  the 
workman  is  guaranteed  his  present  daily  wage:  the  plan  is  to 


LABOR  48 

share  profits,  but  not  losses,  with  him.  He  is  not,  however, 
guaranteed  continuous  employment  should  he  fail  to  reach  the 
standard  of  performance  desired. 

Care  should  be  taken  not  to  make  comparisons  or  draw  con- 
clusions from  the  tabulated  figures  which  are  accidental 
rather  than  essential.  For  example,  if  the  curve  on  page  42, 
showing  the  relation  between  efficiency  and  bonus,  were  differently 
drawn,  the  costs  per  piece  and  wages  per  day  would  all  compare 
differently  with  those  under  the  other  systems  described.  With 
almost  every  system,  there  is  an  endless  variety  of  definite  com- 
pensation scales  possible. 

Just  what  the  scale  should  be  is  always  a  nice  problem.  The 
writer's  sentiment  in  the  matter  is  that  it  should  be  liberal  to 
the  workmen;  one  in  which  a  doubling  of  present  earnings  may 
be  a  realizable  possibility.  There  are  of  course  some  business  con- 
ditions under  which  this  would  be  impracticable.  But  in  general, 
a  highly  profitable  business  ought  to  pay  its  workmen  handsomely 
—to  give  them  a  share.  Intensified  production  is  the  most 
highly  profitable  industry  we  know  of.  Let  us  therefore  be 
generous  with  the  man  whose  cooperation  we  must  have  in  order 
to  make  that  industry  succeed,  and  give  him  a  big  share  in  the 
profits.  Mr  Taylor,  however,  finds  that  an  increase  exceeding 
by  more  than  about  60  per  cent,  the  present  wage  scale  is  detri- 
mental to  the  steadiness  of  the  men.  Perhaps  a  sudden  increase 
in  salary  of  60  per  cent,  would  have  bad  effects  on  any  of  us! 
Business,  we  are  told,  is  war;  but  if  wages  and  profits  can  be 
increased  together,  where  is  there  adequate  ground  for 
belligerency? 

Labor  management  is  thus  attacked  as  a  psychological  problem. 
A  "measuring-stick"  is  provided,  one  that  is  "definite,  accurate 
and  fair,"  by  which  each  man's  individual  performance  is  to  be 
judged.  Conditions  must  be  such  that,  as  far  as  possible,  all 
modifying  factors  shall  be  eliminated,  and  that  the  man's  output 
shall  depend  wholly  upon  himself. 

This  last  stipulation  is  often  difficult  of  realization,  sometimes 
impracticable.  The  workman  then  "takes  his  chance"  and  he 
will  in  the  long  run  win,  if  the  conditions  have  been  fair.  In  a 
large  mill  power  plant,  for  example,  it  was  found  entirely  satis- 
factory to  pay  a  prize  to  that  gang  of  firemen  which  had  during 
the  stated  period  burned  the  least  fuel,  regardless  of  all  modifying 
conditions  whatever.  The  wrong  men  sometimes  won;  but  in  the 


44  WORKS  MANAGEMENT 

long  run  the  prize  money  was  distributed  about  in  accordance 
with  merit. 

Mr.  Gannt  regards  the  determination  of  scale  of  payment  as 
only  one  of  three  essential  elements  in  the  development  of  a 
profit-sharing  system;  the  others  being  the  ascertainment  of 
the  proper  day's  task  and  the  planning  for  continuous  efficient 
work. 

To  make  a  man's  earnings  depend  upon  his  proficiency  elevates 
rather  than  lowers  him  in  the  industrial  scale.  To  impose  a 
tacit  penalty  for  inefficiency  dignifies  those  who  are  efficient  and 
gradually  eliminates  the  unfit.  A  continuous  record  of  the 
efficiency  of  each  man1  becomes  as  essential  to  the  manager  as 
a  Babcock  tester  is  to  the  dairyman  who  cannot  afford  to  maintain 
an  unprofitable  cow.  The  whole  series  of  such  records  tells  the 
degree  of  efficiency  of  the  management. 

The  new  school  of  labor  management  has  for  its  immediate 
aim  a  tripling  of  the  labor-hour  production  at  a  20  to  100  per 
cent,  increase  in  daily  wage.  The  first  two  years  with  the  modern 
methods  at  the  Topeka  railway  repair  shops  are  authoritatively 
stated  to  have  resulted  in  an  average  increase  of  pay  of  14  1/2 
per  cent.,  an  increase  in  output  of  57  per  cent,  and  a  reduction  in 
cost  of  36  per  cent. 

PROFIT-SHARING  AS  A  MANAGEMENT  PROBLEM 

The  introduction  of  these  systems  should  now  be  considered 
from  another  standpoint  than  that  of  costs — from  the  immediate 
standpoint  of  the  shop  supervisor.  Their  most  fundamental 
feature  in  this  respect  is  the  prescription  of  method  and  tool  by 
and  with  which  the  workman  is  to  do  his  work. 

The  concession  has  been  made  that  a  boss  need  rather  know 
how  a  thing  should  be  done  than  be  able  to  do  it  himself.  But  now, 
someone  in  authority  must  not  only  know  how — he  must  know 
how  infinitely  better  than  any  of  his  men — but  he  must  also  if 
necessity  arise,  show  how.  We  thus  have  the  modern  ideas  of 
the  tool-room  staff  and  the  testers.  These  men,  experts  in  their 
particular  kinds  of  work,  determine  definitely  the  best  tool 
and  the  best  method  to  be  employed  for  each  operation. 

In  order  that  the  reward  to  the  man  may  appear  as  an  addition 

1  It  has  been  stated  that  the  older  men,  in  the  machine  shops,  uniformly  do  better  under 
profit-sharing  wage-systems  than  the  others. 


LABOR  45 

to  his  present  daily  wage,  time  and  cost  must  be  determined  for 
both  present  conditions  (by  observation)  and  for  proposed 
standardized  conditions  (by  calculation,  experiment  and  ob- 
servation). The  steps  in  the  study  have  been  presented  in  the 
following  order: 

1.  Devise  a  method  for  determining  present  expenditure  of 
time  on  a  particular  piece  of  work; 

2.  Make  such  improvement  in  conditions  as  can  be  effected 
readily,  and  may  reduce  the  expenditure  of  time; 

3.  Determine  the  elements  of  time  and  cost,  as  for 

a.  Handling  the  raw  material, 

b.  Setting  up  the  work  in  the  machine, 

c.  Machining,   and 

d.  Removing  the  finished  product; 

4.  Determine  what   expenditure   of  time   and   cost   would  be 
necessary  under  ideal  conditions  as  to  all  four  elements,  checking- 
conclusions  by  experiment,  if  necessary; 

5.  Establish  the  scale  of  "bonus,"  "premium,"  or  "efficiency" 
payments  ; 

6..  Guarantee  the  present  wage  (?)  and  establish  a  basis  for  a 
bonus  to  foremen,  etc. 

If  the  bonus  scale  has  been  carefully  worked  out,  it  may  be 
safely  predicted  that  the  workmen  as  a  whole  will  realize  or  im- 
prove to  some  slight  extent  on  the  standard  time  expenditure 
ascertained  under  (4);  and  some  enthusiasts  even  go  as  far  as 
to  contend  for  the  use  of  these  "standard"  rather  than  of  actually 
observed  time  rates  in  estimating  on  new  work. 

In  the  study  of  time  consumption,  various  aids  like  the  stop 
watch,  invisible  watches  inserted  in  the  note-book,  mechanical 
time  recorders,  etc.,  are  employed.  Cut  meters  are  used  in  the 
machine  shop  for  determining  cutting  speeds  on  machine  tools. 
All  original  "time  study"  records  are  carefully  filed  for  future 
reference. 

The  "testers"  are  men  employed  to  experimentally  create 
time  records  for  performing  standard  operations;  they  constitute 
a  force  working  by  themselves  in  a  locked  room,  independently 
of  the  shop  foreman.  The  "speed  boss,"  in  a  staff-organized 
shop,  has  jurisdiction  over  cuts,  feeds  and  speeds  of  machine 
tools,  specifying  such  as  are  proper  for  the  material  at  hand  and 
the  accuracy  and  finish  desired.  He  sees  that  tools  are  standard 
and  set  in  the  standard  way,  and  prescribes  as  to  the  use  of 


46  WORKS  MANAGEMENT 

cutting  oils,  soaps  and  compounds.  He  may  have  jurisdiction 
over  belts  and  belt  speeds,  and  will  in  any  case  insist  on  good 
condition  of  machine  driving  belts.1  He  is  the  man  who  will 
surely  discover  the  badly-manned  department.  In  a  shop 
making  small  machined  parts,  the  force  of  63  men  was  reduced  to 
22  men  within  one  month  after  the  advent  of  the  speed  boss. 

Three  elements  in  operation  have  been  emphasized  as  a  result 
of  recent  time  studies.  The  first  of  these  is  the  material  " des- 
patching" element.  To  get  materials  and  tools  to  the  man  when 
and  where  he  needs  them  is  an  important  matter.  Under  day- 
work  organization,  any  delay  in  this  respect  gave  the  man  an 
excuse  for  low  productiveness.  Now  he  wants  no  excuse  and 
resents  delays.  An  adequate  system  and  proper  facilities  for  the 
interdepartmental  despatch  of  new  and  finished  materials  is 
now  at  least  as  important  as  a  power  plant.  "Lost  motion" 
must  be  eliminated;  materials  and  tools  are  brought  to  the  work- 
man by  lower-priced  labor;  a  program  or  plan  is  provided  so  that 
at  any  hour  each  item  of  material  or  equipment  shall  be  where  it 
is  needed  and  not  elsewhere.  The  old-fashioned  grindstone — 
the  village  tavern  of  the  shop,  gathering  place  for  gossip  and 
recuperation — is  a  thing  of  the  past. 

Marked  improvement  in  productivity  has  been  realized  in 
erecting  and  assembling  machinery;  and  in  such  work  despatch 
is  of  particular  importance.  Failure  of  a  boy  to  drill  one  hole 
may  delay  a  large  gang  of  men  a  long  time. 

Tools  must  not  only  be  at  hand  when  wanted,  they  must  be 
conveniently  at  hand,  placed  where  accessible  and  where  they 
can  be  easily  identified  one  from  another,  and  they  must  be 
supplied  in  excess  of  probable  requirements.  The  same  stipula- 
tion applies  to  material  to  be  used,  and  the  proper  devices  for 
handling  that  material  must  be  concurrently  available. 

A  second  factor  now  strongly  emphasized  is  the  setting  up  of 
work.  With  many  machine  jobs,  a  large  proportion  of  the  total 
time  is  consumed  in  getting  the  piece  in  the  machine.  Experi- 
ence has  shown  that  a  saving  of  30  to  50  per  cent,  is  possible  in 
this  respect  by  scientific  improvement  of  conditions.  Thoroughly 
suitable  jigs  and  chucks  should  be  standardized  for  the  various 
classes  of  work,  and  the  variety  of  makeshifts  which  accumulate 
about  the  average  shop  should  be  inexorably  scrapped.  All 

1  In  one  instance,  attention  to  these  matters  reduced  the  cost  of  belt  maintenance  74  per 
cent.,  while  simultaneously  decreasing  belt  failures  by  68  per  cent. 


LABOR  47 

clamping  devices  for  hand  work  on  the  assembly  floor  and  else- 
where must  be  interchangeable,  and  the  system  for  serving  the 
workman  with  tools  should  also  supply  him  with  setting-up 
equipment.  The  tool-room  experts  and  time-study  men  will 
determine  as  to  the  proper  time  allowance  for  setting  up  work. 
In  some  shops,  the  regular  men  simply  run  the.  machines,  a 
special  set  of  men  being  charged  with  the  work  of  placing  the 
material  in  the  machine. 

A  third  feature  of  the  modern  system  is  in  the  inspection. 
Material  transferred  between  departments,  if  defective  in  any 
respect  which  may  impair  the  recipient's  productivity,  will  be 
sure  to  have  its  defect  exposed:  but  if  the  fault  is  not  of  this  kind, 
no  such  result  may  follow.  Product  leaving  the  last  hand  for  the 
consumer  may  need  especially  rigorous  inspection  under  inten- 
sified production  conditions.  Tools,  gages,  and  templates 
furnished  the  workman  may  also  require  such  special  inspection. 

On  the  whole,  the  modern  systems  necessitate  a  more  detailed 
and  rigorous  system  of  inspection  of  work  passing  between 
departments,  and  of  finished  work,  than  did  older  systems  of 
management.  Mr.  F.  W.  Taylor  gives  an  interesting  example 
illustrative  of  this  point,  in  connection  with  the  inspection  of 
bicycle  balls  in  a  shop  where  this  very  work  of  inspection  was 
changed  from  a  day-rate  to  a  piece-rate  basis. 

An  opponent  of  intensified  production  systems  would  certainly 
regard  inspection  as  the  very  last  kind  of  work  in  which  a  profit- 
sharing  system  of  payment  could  be  applied.  About  120  girls 
were  employed  in  this  instance,  to  inspect  an  annual  output  of 
many  millions  of  these  balls,  each  of  which  had  to  be  examined 
individually  for  dents,  softness,  scratches,  and  fire  cracks.  The 
girls  were  skilled  in  the  work,  which  had  been  regularly  carried  on 
for  eight  or  ten  years. 

"The  first  move  before  in  any  way  stimulating  them  toward  a 
larger  output  was  to  insure  against  a  falling  off  in  quality.  This 
was  accomplished  through  over-inspection.  Four  of  the  most 
trustworthy  girls  were  given  each  a  lot  of  balls  which  had  been 
examined  the  day  before  by  one  of  the  regular  inspectors,  the 
number  identifying  the  lot  having  been  changed  by  the  foreman 
so  that  none  of  the  over-inspectors  knew  whose  work  she  was 
examining.  In  addition,  one  of  the  lots  inspected  by  the  four 
over-inspectors  was  examined  on  the  following  day  by  the  chief 
inspector,  selected  on  account  of  her  accuracy  and  integrity. 


48  WORKS  MANAGEMENT 

"An  effective  expedient  was  adopted  for  checking  the  honesty 
and  accuracy  of  the  over-inspection.  Every  two  or  three  days 
a  lot  of  balls  was  especially  prepared  by  the  foreman,  who  counted 
out  a  definite  number  of  perfect  balls,  and  added  a  recorded 
number  of  defective  balls  of  each  kind.  The  inspectors  had  no 
means  of  distinguishing  this  lot  from  the  regular  commercial  lots. 
And  in  this  way  all  temptation  to  slight  their  work  or  make  false 
returns  was  removed."  (Trans.  A.  S.  M.  E.}  XXIV,  1383.) 

Following  this  plan  of  insurance  against  deterioration  in  quality 
of  work,  accurate  daily  records  were  started  of  the  quantity  and 
quality  of  output  of  each  girl.  The  scale  of  day  pay  was  read- 
justed on  the  basis  of  the  information  given  by  these  records. 
Detailed  time  studies  were  made.  Talking  while  at  work  was 
stopped  by  separating  seats.  The  day's  work  was  reduced  from 
10  1/2  to  8  1/2  hours,  with  two  10-minute  recesses  allowed  each 
day.  A  differential  piece  rate  was  then  introduced,  not  for  high 
output  (a  definite  standard  output  was  established)  but  for  greater 
accuracy  in  inspection  as  determined  by  the  over-inspectors. 
The  force  of  girls  was  reduced  from  120  to  35;  average  weekly 
wages  increased  from  $3.50  or  $4.50  per  wf»ek  up  to  $6.50-$9.00. 
There  were  58  per  cent,  more  defective  balls  sent  out  under  the 
old  day  work  system  than  under  the  new  plan. 

THE  INTRODUCTION  OF  PROFIT-SHARING  SYSTEMS 

Here  careful  planning  and  diplomacy  are  needed.  The 
thorough  reorganization  of  an  existing  works  along  modern  lines 
may  be  a  matter  of  two  to  five  years.  Nothing  can  be  gained 
and  much  will  certainly  be  lost  by  undue  haste.  The  system 
should  be  installed  gradually  and  made  to  justify  itself  to  owner 
and  employee  as  it  progresses.  The  right  man  must  be  selected 
to  introduce  such  a  revolutionary  change  as  profit-sharing  in- 
volves: "none  but  Ulysses  can  bind  Ulysses'  bow." 

In  an  engineering  works,  the  improvement  may  well  begin  at 
the  drafting-room.  A  chief  draftsman  of  progressive  type,  pre- 
ferably one  having  had  shop  experience,  should  apply  it  to  his 
own  work.  Intensified  production1  is  by  no  means  inapplicable 
to  drafting  and  clerical  work.  One  of  the  first  steps  is  to  abso- 

1  Even  the  typewriting  of  letters  has  been  paid  for  on  a  premium  basis.  In  one  office,  the 
statistical  work  was  thus  organized,  curves  of  the  type  described  in  Chapter  III  being  drawn 
by  men  whose  time  expenditure  for  performing  the  calculation,  marking  the  point  and 
drawing  the  line  was  standardized  at  200  such  complete  operations  per  hour. 


LABOR  49 

lutely  eliminate  "designing  in  the  shop"  by  making  all  draw- 
ings, sketches  and  instructions  unusually  definite  and  complete. 
In  most  plants  this  would  mean  a  considerable  increase  in  ex- 
penditure in  the  drafting  room — an  increase  which  is,  however, 
unquestionably  profitable. 

This  must  be  faced  cheerfully,  and  the  chief  draftsman  given 
such  assistance  as  may  be  necessary  to  afford  him  time  and 
energy  for  betterment  work.  Much  preliminary  planning  in 
standardizing  parts  and  products  will  also  be  necessary.  A 
more  thorough  study  of  designs  with  relation  to  facility  and 
cheapness  in  construction  and  erection  will  be  undertaken. 

Regular  meetings  of  officials  to  be  concerned  in  the  reorganiza- 
tion will  be  inaugurated.  At  these  meetings  there  will  be 
free  criticism  and  discussion,  and  the  old  idea  of  territorial 
sovereignty  on  the  part  of  departmental  foremen  will  be 
seriously  modified.  No  man  will  be  expected  to  proceed  there- 
after on  the  basis  of  his  own  unsupported  judgment.  The 
standardization  of  shop  methods  under  the  general  supervision 
of  such  a  shop  committee  will  be  finally  entrusted  to  a  properly 
qualified  subordinate  staff. 

OBJECTIONS  TO  MODERN  LABOR  SYSTEMS 

Approval  of  the  methods  described  in  this  chapter  is  by  no 
means  unanimous,  even  among  managers.  It  is  urged  that  they 
involve  the  assumption  that  a  setter  of  time  rates  can  be  infallible; 
that  "all  the  brains  are  in  the  office";  that  a  machine  operator 
is  presumed  to  have  no  original  ideas  of  time  or  money  value. 
The  workman  is  not  encouraged  or  expected  to  improve  on  his  in- 
structions; such  improvement  is  in  fact  often  positively  dis- 
couraged. 

There  is  ground  for  these  objections,  and  the  advocates  of 
profit-sharing  systems  have  not  absolutely  refuted  them,  per- 
haps because  they  have  been  too  busy  at  more  profitable  en- 
terprises. Yet  if  the  modern  method  is  what  it  is  claimed  to  be, 
no  expenditure  of  time  in  convincing  the  industrial  public  of  that 
fact  is  too  much  to  contemplate. 

The  root  objection  is  one  that  resolves  itself  into  a  question 
of  pure  fact.  Can  the  combined  capacity  of  a  man  and  a  machine 
be  determined?  Absolutely,  perhaps  not;  nor  is  it  necessary 
that  it  should  be.  The  modern  system  aims  to  determine  that 

4 


50  WORKS  MANAGEMENT 

capacity  within  a  known  reasonable  margin  of  error:  the  old 
piece-work  system  virtually  made  no  effort  at  all  to  determine 
it.  It  guessed. 

The  rate-setter  is  not  infallible.  He  may  make  mistakes; 
these  can  be  corrected.  He  may  never — is  never — exactly  right; 
but  he  can  be  nearly  enough  right  to  reach  the  desired  result, 
the  setting  of  a  standard  of  performance  which  shall  permit  of  a 
wage  scale  remunerative  to  all  parties  concerned. 

While  the  idea  of  task-work  under  instructions  is  fundamental, 
this  should  eventually  be  no  more  objectionable  than  the  pre- 
scription of  an  apparently  awkward  method  of  holding  a  cold 
chisel  is  to  a  "green"  apprentice.  Under  the  modern  systems, 
all  of  the  workmen  must  learn  over  again  how  to  do  certain 
things.  For  the  time  being,  they  again  become  apprentices.  If 
the  new  ways  of  doing  things  are  not  better  ways  they  will  surely 
be  abandoned.1 

There  can  be  the  same  incentive  offered  for  improvement  as 
under  the  old  day  work  system.  The  man  whose  ideas  are 
valuable  will  never  be  discouraged  by  a  sensible  supervisor. 
The  new  school  merely  prescribes  that  the  man  shall  learn  and 
perfect  himself  in  the  prescribed  method  first.  When  he  has 
attained  the  standard  result,  if  he  then  believes  a  better  result  to 
be  possible,  his  scheme  should  be  tried,  honestly  tried;  and, 
if  it  prove  good,  it  may  become  the  standard. 

But  what  is  to  be  the  effect  of  the  new  methods  on  the  supply 
of  skilled  workmen?  Already  in  certain  trades  the  all-around 
journeyman  has  practically  disappeared.  The  specialization 
which  surely  accompanies  standardizing  and  intensified  produc- 
tion will  accentuate  this  condition.  Trade  apprenticeship  is  be- 
coming uncommon.  The  limitations  imposed  by  the  labor 
unions,  the  unattractiveness  of  a  long  apprenticeship  to  the 
average  boy,  the  opportunities  for  entering  avocations  deemed 
more  honorable  or  profitable  than  that  of  the  manual  worker — 
al  of  these  causes  are  reducing  the  "birth  rate"  of  skilled  work- 
men.2 Ordinary  laborers  may  qualify  for  the  economical  per- 
formance of  repetitive  work;  they  may  even  by  a  process  of 

*  Mr.  Gilbreth's  Motion  Study  goes  into  the  matter  more  deeply  still;  he  analyzes  not 
merely  methods,  but  motions,  physical  movements,  in  their  anatomy  and  combinations. 

2  It  has  been  stated  that  only  10  per  cent,  of  the  boys  who  become  apprentices  in  machine 
tool  building  plants  "serve  out  their  time." *  No  doubt  a  factor  in  this  falling  off  is  the 
exploitation  of  the  boys  by  their  foremen;  they  are  put  on  special  work  where  their  time 
is  spent  with  profit  to  the  employer  but  without  much  benefit  to  the  apprentice.  The 
boy's  future  prospects  are  sacrificed  for  the  present  gain  of  the  "boss." 


LABOR  51 

natural  selection  produce  from  among  themselves  the  necessary 
experts  and  foremen.  Trade  schools  cannot  begin  to  supply  the 
demand  for  skilled  men.1 

1  Apprenticeship. — An  apprentice  is  a  pupil  or  learner  who  enters  into  a  contract  with  an 
employer,  under  which  he  gives  his  services  in  return  for  his  training  in  the  trade  plus  a 
(usually  small)  wage.  The  term  of  the  apprenticeship  contract  or  indenture  has  steadily  de- 
creased. It  was  once  seven  years;  three  years  is  the  usual  time  at  present.  The  philoso- 
phy of  the  system  may  be  illustrated  from  the  writer's  personal  experience.  He  was  appren- 
ticed at  a  i  hourly  wage  of  5  cents  for  the  first  year.  This  was  to  increase  to  7  cents  the  second 
year  and  10  cents  the  third.  During  the  third  year,  if  the  boy  was  worth  anything,  he 
usually  became  as  active  a  producer  as  the  "laborer,"  who  received  from  the  start  15  cents 
an  hour,  but  was  given  no  educational  opportunities.  But  whereas  the  laborer  could  never 
hope  to  make  more  than  15  cents  (excepting  under  most  exceptional  circumstances)  the 
apprentice,  as  soon  as  his  three  years  had  expired,  received  20  cents  an  hour.  Piece  work 
put  an  end  to  this  (already  antiquated)  system  about  1893. 

From  the  time  of  the  guilds  of  the  middle  ages,  there  existed  a  sentiment  that  the  trades 
and  the  public  must  be  "protected"  by  forbidding  the  practice  of  a  trade  excepting  by  those 
men  having  served  a  specified  apprenticeship.  There  were  laws  to  this  effect.  Arbitrary 
division  lines  between  the  trades  were  introduced,  with  the  same  embarrassing  consequences 
as  exist  in  the  building  trades  in  New  York  City  to-day. 

The  great  economist,  Adam  Smith,  advanced  some  ideas  on  this  subject  that  would  even 
now  be  regarded  as  novel.  He  claimed  that  long  apprenticeships  were  unnecessary ;  that  a 
few  weeks  should  suffice  to  teach  an  intelligent  person  a  manual  trade.  He  proposed  pay- 
ing to  the  apprentice  full  journeyman's  wages,  with  deduction  for  spoiled  work  (perhaps  a 
forecast  of  the  bonus  system) ,  claiming  that  this  would  develop  habits  of  efficiency  and  that 
the  whole  tre  id  of  the  then  existing  systems  of  iidenture  was  toward  monopoly. 

Mr.  O.  M.  Becker  (The  Engineering  Magazine,  November,  1906)  states  three  reasons  for 
the  present  failure  of  apprenticeship  systems: 

1.  Greed  of  foremen  who  work  the  boys  for  immediate  productiveresuJts. 

2.  Loose  verbal  agreements. 

3.  Lack  of  encouragement  and  instruction. 

Mr.  Becker  recommends  the  appointment  of  a  supervisor  of  apprentices  who  shall  correct 
these  conditions  and  keep  in  personal  touch  with  the  boys.  Carefully  worked  out  apprentice- 
ship systems  are  in  vogue  in  the  works  of  the  Brown  and  Sharp  Mfg.  Co.,  R.  Hoe  &  Co.,  the 
Warner  and  Swasey  Co.,  the  All'.s-Chalmers  Co.  and  the  Westinghouse  Electric  and  Manu- 
facturing Company.  A  digest  of  these  calls  attention  to  the  following  factors: 

Age  Limit. — At  start,  in  one  instance,  from  17  to  21  years;  or  (in  most  cases)  a  grammar 
school  education;  reduction  in  term  of  indenture,  sometimes,  for  boys  having  had  more 
schooling. 

Term. — Three  to  four  years  seems  to  be  the  desired  ideal.  This  may  be  reduced,  it  is 
agreed,  if  systematic  instruction  is  included  in  the  plan.  Neither  term  nor  wage  has  any 
apparent  influence  on  the  supply  of  boys. 

Wage. — In  one  case,  4,  8,  9,  12  cents  for  the  four  years.  The  premium  system  is  some- 
times applied.  One  writer  concedes  that  8  cents  is  too  low  a  wage. 

Inducements. — A  bonus  (usually  $100)  is  sometimes  paid  to  those  who  complete  their 
term.  Tools  are  occasionally  furnished  by  the  employer.  Cheap  boarding  places  may  be 
provided. 

Education. — The  factory  school  is  an  occasional  adjunct,  instruction  more  or  less  sys- 
tematic being  given  by  heads  of  departments.  An  allowance  of  time  may  be  made  for  study 
Sometimes  boys  are  required  to  attend  night  school  outside,  with  or  without  such  time 
allowance. 

In  the  Baldwin  Locomotive  Works,  Philadelphia,  three  forms  of  indenture  are  used : 

1.  For  boys  of  17  or  more,  having  had  common  school  education,  who  are  bound  to  serve 
four  years,  and  who  agree  for  three  years  to  attend  night  school  for  the  study  of  algebra, 
geometry  and  drafting.     Upon  satisfactory  completion  of  this  service,  a  bonus  of  $125  is 
paid. 

2.  For  boys  of  18  or  more,  who  have  had  advanced  grammar  or  high  school  training,  who 
will  agree  to  attend  night  school  for  two  years  for  the  study  of  drafting.     These  are  bound 
for  three  years  and  receive  a  bonus  of  $225  upon  completion  of  indenture. 


52 


WORKS  MANAGEMENT 


But  it  is  unfair  to  attribute  the  scarcity  of  trained  men  at  the 
present  moment  wholly  or  even  in  any  large  measure  to  the 
specialization  of  profit-sharing  systems,  for  these  systems  have 
not  yet  come  into  general  application.  The  causes  for  this  scar- 
city would  exist  (in  this  country)  anyway.  And  on  the  whole,  is 
this  scarcity  altogether  a  bad  sign?  It  would  seem  that  Mr. 
Gilbreth's  suggestion  for  a  reclassification  of  the  trades  is  justi- 
fied from  a  consideration  of  the  matter.  Instead  of  having  ex- 
pert machinists  and  expert  bricklayers  of  all-around  ability,  we 

3.  For  graduates  of  technical  institutions,  21  years  of  age.  These  serve  two  years  under 
agreement  and  the  works  is  obligated  to  teach  them  the  mechanical  art.  They  receive  no 
bonus. 

In  all  cases  the  works  retains  the  right  to  dismiss  for  cause.  About  33  per  cent,  of  all 
apprentices  entering  have  been  so  dismissed. 

TABULAR  STATEMENT  (1906) 


Class  1 

Class  2 

Class  3 

Total 

Total  number  enrolled  since  1901  

471 

224 

117 

812 

Number  enrolled  in  1904  

59 

Number  enrolled  in  1905  

95 

76 

31 

202 

Number  now  on  roll 

405 

DISTRIBUTION  OF  1905  ENROLLMENT 


Machinists  

169 

Blacksmiths  

4 

Sheet  ironworkers  2 

Molders  

2 

Boiler  makers  

9 

Brass  finishers  

7 

Pattern  makers  

9 

Of  the  present  enrollment,  36  apprentices  are  from  foreign  countries. 

Of  the  apprentices  enrolled  and  graduated  since  1900,  five  are  now  foremen,  one  is  in  the 
main  office,  one  is  assistant  engineer  of  tests,  three  are  assistant  foremen,  one  is  a  contractor, 
24  are  erecting  shop  track  bosses,  6  are  employed  on  special  work,  and  a  large  number 
of  the  remainder  have  desirable  piece  work  jobs.  Of  the  41  men  specially  mentioned, 
about  20  are  from  Class  3,  the  others  being  about  equally  divided  between  Classes  1  and  2. 

Comments. — Engineer-managers,  as  trained  men,  should  believe  in  trained  men  and  should 
therefore  favor  those  who  have  at  some  sacrifice  elevated  their  standard  of  serviceableness. 
But  the  present  ideal  of  apprenticeship  and  the  present  conception  of  scope  in  the  trades 
seem  likely  to  be  altered. 

A  boy  cannot  do  a  full  day's  work  and  study  besides.  Every  boy  in  these  days  should 
have  at  the  very  least  a  grammar  school  training.  The  education  in  algebra,  geometry  and 
drafting  that  he  needs  to  make  him  a  first-class  workman  should  be  furnished  by  the  shop  in 
shop  time.  Terms  of  apprenticeship  should  be  further  reduced  by  training  boys  more 
systematically.  It  should  be  possible  to  make  such  terms  vary  inversely  as  the  amount  of 
schooling  the  boys  have  had. 

Wages  are  too  low.  The  boys  should  be  self-supporting  from  the  start.  An  increase  in 
bonus  for  completion  of  the  term  should  be  preferred,  however,  to  a  great  increase  in  wage 
scale.  Too  much  of  an  increase  in  this  latter  direction  would  be  bad  on  several  grounds. 
The  provision  of  good  board  at  a  reasonable  rate  would  help  out  the  financial  difficulty 

Wages  and  terms  must  vary  in  different  industries  and  in  different  sections  of  the  country. 
The  most  promising  boys  to  cultivate  are  the  country  lads,  having  homes  not  too  far  from 
the  manufacturing  cities. 


LABOR  53 

may  two  or  three  generations  hence  have  expert  men  in  the 
different  phases  of  these  trades;  an  expert  tool  grinder,  who 
could  scarcely  chuck  a  bar;  an  expert  face  bricklayer  who  could 
not  set  up  an  arch,  etc.  Trade  apprenticeship  would  then  be 
regarded  as  unnecessary,  a  waste  of  three  or  four  years'  time  at 
nominal  wages  which  modern  conditions  will  have  made  it 
possible  to  dispense  with. 

Instead,  boys  (or  men)  will  learn  with  great  rapidity  how  to 
perform  some  special  operation  in  the  trade,  attaining  a  scale  of 
daily  wage  now  not  reached  by  the  most  expert  of  the  " all- 
around7'  men,  because  of  their  vastly  higher  productiveness. 

THE  EFFECT  ON  THE  WORKMAN 

In  the  discussions  of  the  past  few  years  regarding  improved 
agricultural  methods,  the  question  is  sometimes  asked,  "What  if 
everyone  did  so?"  If  all  farmers  should  tile-drain,  irrigate, 
rotate  crops,  grow  clover,  and  spray  fruit;  would  not  the  increased 
reward  now  obtained  by  the  few  who  do  these  things  disappear? 
And  similarly,  if  the  workman's  production  is  generally  tripled, 
will  not  the  action  of  competition  and  of  the  laws  of  supply  and 
demand  bring  about  a  gradual  lowering  of  the  daily  wage  again 
to  its  present 'level? 

Two  suggestions  may  be  made.  In  the  first  place,  not  all 
farmers  will  practice  scientific  agriculture — not  at  least  for 
generations  to  come.  Nor  will  manufacturers  generally  practice 
scientific  management.  There  are  only  a  few  in  every  industry 
who  use  the  best  methods;  and  to  these  few  the  large  profits  are 
awarded.  The  workman  who  increases  his  individual  produc- 
tiveness now  will  for  a  long  time  to  come  be  in  a  superior  position 
to  the  mass  of  workmen. 

And  there  is  an  argument  still  more  fundamental.  We  in  this 
world  have  just  two  things  to  do:  to  produce  all  we  can,  and  to 
obtain  a  just  share  of  what  we  produce.  The  first  thing  is  the 
economic  subject  of  production,  the  second  suggests  the  economic 
topic  of  distribution.  Nothing  can  be  distributed  until  it  is  first 
produced.  The  more  that  is  produced,  the  more  there  will  be  to 
distribute.  In  the  last  analysis,  all  of  the  wealth  in  the  world 
comes  from  human  sweat,  from  the  labor-hour.  Whatever 
increases  the  labor-hour  production  augments  the  supply  of 
wealth,  increases  the  visible  assets  of  the  world.  There  can  be 


54  WORKS  MANAGEMENT 

no  harm  in  this.  Other  things  remaining  equal,  the  more  we 
produce,  the  more  we  shall  obtain.  If  bad  economic  conditions 
temporarily  interfere  with  this,  the  remedy  is  to  improve  those 
conditions,  certainly  not  to  decrease  production. 

Money  does  not  measure  cost  or  value.  The  blacksmith  of 
King  Arthur's  age  earned  a  penny  a  day,  but  that  penny  might 
feed  him  for  a  week.  The  ultimate  measure  of  value  is  the  labor- 
hour.  The  ultimate  determining  factor  in  the  available  supply 
of  the  good  things  of  this  world  is  the  labor-hour  output  of  the 
average  man. 

[Perhaps  the  best-known  application  of  the  methods  described  in  this 
chapter  has  been  in  connection  with  the  betterments  in  the  motive  power 
department  of  the  Atchison,  Topeka  and  Santa  Fe  Railroad.  A  bibli- 
ography of  the  publications  dealing  with  this  enterprise  was  printed  in  the 
American  Engineer  in  October,  1907.] 


CHAPTER  V 

MATERIAL 

Economy  in  manufacture  is  related  to  materials  consumed  in 
the  following  ways: 

1.  These  materials  must  be  secured  at  the  minimum  possible 
cost  for  the  necessary  quality.     In  buying  coal,  for  example,  the 
number  of  thermal  units  obtained  for  one  cent  is  the  chief  basis 
for  comparison. 

2.  The  kind  and  quality  of  material  must  be  such  as  will:  a. 
Involve  the  least  expense  in  fabrication,  and  6.  result  in  the 
most  valuable  product. 

For  example,  flaxseed  which  had  become  wet  might  be  secured 
at  a  very  low  price  considering  the  oil  which  it  contained,  but 
might  nevertheless  be  undesirable  because  of  the  great  difficulty 
in  handling  and  working  the  seed  in  the  linseed-oil  mill. 

Again,  rag  stock  is  very  costly  for  a  paper  mill,  but  a  paper 
made  from  rag  stock  might  sell  for  15  cents  a  pound  as  against  a 
3  1/2-cent  price  for  a  paper  made  from  wood  pulp. 

3.  Material  must  be  so  employed  as  to  obtain  therefrom  the 
greatest  possible  quantity  of  product. 

4.  Any  necessarily  discarded  portion  should  be,  if  possible, 
profitably  utilized. 

5.  Proper  facilities  and  equipment  must  be  provided  for  eco- 
nomically moving  and  handling  raw,  partly  finished  and  finished 
materials  to  and  through  the  works. 

6.  There  must  be  an  adequate  system  of  organization  for 
insuring  that  materials  shall  be  at  hand  where  and  when  wanted, 
without  maintaining  unnecessarily  large  stocks. 

.7.  All  expenditures  for  material  should  be  ultimately  charged 
against  some  item  or  unit  of  productive  output. 

These  considerations  may  suggest  the  following  topics  as  nec- 
essarily to  be  treated  under  the  general  heading  of  "materials." 
Material  costs  and  methods  of  cost  finding. 
Purchasing. 

The  function  of  the  storeroom. 
Economics  of  material  utilization. 
55 


56  WORKS  MANAGEMENT^ 

COST-KEEPING  SYSTEM 

When  the  term  cost-keeping  is  employed  without  qualification, 
material  costs  are  first  thought  of.  And  to  know  the  cost  even  of 
materials  consumed  for  each  item  of  product  is  by  no  means  easy. 
Most  manufacturers  think  they  know;  some  only  guess.  If  a 
plant  made  only  one  thing  at  a  time,  and  purchased  each  time 
just  enough  new  material  to  make  that  one  thing,  it  might  con- 
ceivably obtain  an  infallible  record  of  its  material  cost  for  pro- 
ducing that  one  thing.  But  all  plants  make  many  things  at 
once  and  the  purchase  of  material  is  often  only  indirectly  related 
to  the  things  to  be  made. 

As  with  statistical  records  in  general,  a  material  cost  system 
should  not  merely  show  the  facts,  it  should  give  data  for  ascertain- 
ing the  reasons  for  the  facts.  Such  a  system  is  a  "tool"  (to  be 
kept  in  good  condition)  "for  cutting  down  costs." 

Managers  have  been  sometimes  known  to  profess  indifference 
as  to  costs.  They  are  making  money,  there  is  no  competition, 
and  that  suffices.  But  even  a  profitable  business  may^include 
some  departments  or  operations  which  are  unprofitable  or  rela- 
tively less  profitable.  These  should  be  discovered.  And  a 
proper  control  of  costs  may  enable  even  a  profitable  busi- 
ness to  become  more  profitable,  either  directly  or  by  permitting 
of  increased  output  without  expenditure  for  equipment.  And 
finally,  the  piping  times  of  peace  are  the  times  in  which  to  prepare 
for  war. 

A  material  cost  system  must  tolerate  no  "averaging,"  no 
grouping  by  departments.  It  must  not  ascertain  the  consump- 
tion and  value  of  raw  materials  used  by  occasional  computation 
or  experiment.  Its  function  is  to  ascertain 

The  Actual  Consumption  and  Cost  of  Every  Material  Consumed 
for  Every  Item  or  Unit  of  Product. 

This  knowledge  is  necessary  in  order  that  selling  prices  may  be 
intelligently  fixed.  It  is  also  necessary  for  intelligent  shop 
management.  The  system  should  originate  with  the  inception 
of  the  works,  but  if  the  plant  already  exists,  then  it  must  be 
gradually  installed.  The  larger  items  of  cost— the  '  'high  spots" 
— are  of  course  the  first  to  be  analyzed. 

It  is  in  the  control  of  his  costs  that  the  superintendent  or  the 
department  chief  shows  whether  he  is  a  mere  routine  man  or  a 


MATERIAL  57 

money-saver.  If  he  is  burdened  with  detailed  clerical  work  that 
might  be  performed  by  cheaper  men;  or  if  his  clerical  assistance 
is  of  such  character  as  to  add  to  rather  than  detract  from  his 
anxieties — then  he  cannot  be,  in  the  fullest  sense,  a  money- 
saver.  And  if  he  is  sufficiently  broad-minded  he  will  recognize 
the  fact  that  however  much  of  a  specialist  he  may  be  in  his 
business  there  are  outside  men,  expert  not  in  his  business  but  in 
the  highly  specialized  business  of  reducing  costs  anywhere,  who 
can  do  what  he  cannot.  He  should  use,  not  oppose,  such  men. 
He  should  regard  them  as  he  does  the  real  estate  man  or  the 
lawyer — men  whose  advice  he  needs  badly  when  he  needs  it; 
men  of  whose  services  he  cannot  afford  to  deprive  himself. 
Some  men  there  may  be,  among  the  "efficiency  engineers/' 
who  are  shysters;  so  also  are  some  men  in  other  professional 
fields. 

PURCHASING  METHODS 

The  purchasing  agent  is  responsible  for  the  money  cost  per 
unit  of  quantity  and  quality  of  goods  received  by  the  works. 
He  has — or  may  have — four  methods  of  buying: 

1.  Purchasing  "over  the  counter/'  as  when  a  woman  at  a 
grocery  store  pays  the  market  price,  presumably,  for  a  dozen 
eggs. 

2.  "Shopping,"  as  in  the  case  of  a  prospective  purchaser  of 
an  automobile,  who  visits  several  salesrooms  inquiring  for  prices 
and  finally  acts  when  suited. 

3.  Ordering  from  price  lists  and  discount  sheets  kept  on  hand 
for  materials  regularly  consumed. 

4.  Contracting  with  the  lowest  (or  otherwise  most  desirable) 
bidder  on  goods  to   be  furnished   to   comply  with   stipulated 
specifications. 

The  importance  of  purchasing  as  one  of  the  industrial  opera- 
tions varies  greatly  with  the  type  of  industry.  In  a  process- 
industry,  where  some  single  raw  material  is  subjected  to  a  single 
simple  process,  as  in  flour  mills,  wood  pulp  mills,  and  some  oil 
works,  purchasing  is  the  most  important  of  all  functions,  and 
may  be  directly  in  charge  of  the  chief  executive. 

In  a  "factory"  (textile  mill,  machine  shop,  etc.),  where  labor 
is  the  chief  element  of  cost,  purchasing  is  less  a  matter  of  "close 
buying"  in  the  ordinary  sense  than  of  expert  knowledge  regard- 


58  WORKS  MANAGEMENT 

ing  the  relation  between  character  of  raw  material  and  probable 
cost  of  fabrication.  A  machine  shop  which  purchased  all  castings 
might,  for  example,  do  better  when  paying  a  fancy  price  for 
exceptionally  workable  castings  than  when  receiving  inferior 
material  at  a  lower  price. 

In  a  public  service  corporation,  the  largest  expenditures  for 
material  may  be  those  made  by  the  departments  of  construction 
and  maintenance.  These  departments  are  officered  by  engi- 
neers, and  the  materials  consumed  by  them  are  usually  such  as 
can  be  intelligently  purchased  only  by  men  of  technical  experi- 
ence. Consequently,  arrangements  for  the  purchase  of  such 
material  are  made  by  the  department  officials  themselves,  and 
this  buying  often  constitutes,  in  fact,  a  chief  part  of  their 
work. 

It  is  in  the  ordinary  "manufacturing  business/'  like  a  paper  mill 
or  a  chemical  or  engineering  works,  or  a  railroad,  where  many 
raw  materials  of  comparable  importance  are  consumed,  and 
where  the  cost  of  materials  is  usually  fuPy  equal  to  that  of 
labor,  that  the  status  of  the  purchasing  agent  is  most  firmly 
established. 

The  initial  step  toward  any  expenditure  for  materials  is  made 
when  the  purchasing  agent  receives  a  requisition  from  some 
department  head.  Nothing  is  ever  bought  except  upon  re- 
quisition from  some  one.  This  document  will  have  a  date,  a 
number  which  may  be  referred  to  in  any  inter-departmental  cor- 
respondence, a  signature  and  an  approval  signature.  It  will 
state  what  is  wanted,  with  full  specification  as  to  quality,  quantity, 
and  time  of  delivery  required.  It  may  have  an  acknowledg- 
ment stub,  beyond  a  perforated  edge,  for  return  to  the  depart- 
ment in  which  it  originated  after  endorsement  with  such  informa- 
tion as  may  be  proper.  It  should  provide  space  for  the  buyer's 
notations  as  to  quotations  relevant,  purchasing  order  number, 
dates  of  action,  etc.  The  requisition  remains  a  '  'live"  document, 
and  is  kept  in  the  "pending"  file,  until  the  purchasing  order, 
which  takes  its  place,  has  been  issued. 

Upon  receipt  of  the  requisition,  the  purchasing  department 
may  at  once  issue  its  purchasing  order  (if  it  is  thoroughly  posted 
at  the  moment  on  the  applicable  market  prices)  or  it  may 
send  out  to  various  parties  with  whom  it  deals  its  regular  form 
of  request  for  quotation.  These  may  be  in  duplicate,  the  duplicate 
being  printed  on  a  stiff  card  for  permanent  filing  after  the 


MATERIAL  59 

requested  quotation  of  price  has  been  received  and  noted  ther.eon.1 
Such  records  of  prices  will  be  consecutively  numbered  and  filed 
and  indexed  daily,  although  original  letters  of  quotation  may  be 
temporarily  affixed  to  pending  requisitions.  Quotations  may 
be  requested,  and  in  many  cases  received,  by  telephone,  in  which 
cases,  a  memorandum  of  the  price  is  made  on  the  requisition  and 
afterward  transferred  to  the  card  form  of  "request  for  quotation" 
for  filing.  The  receipt  of  quotations  may  be  acknowledged, 
although  this  is  not  invariably  done. 

Alternatively,  of  course,  all  materials  used  may  be  classified 
and  a  perpetual  record  kept  of  prices  on  each  kind  of  material. 

The  purchasing  order  is  issued  when  sufficient  knowledge  as 
to  market  prices  has  been  obtained.  It  (or  its  copy,  rather) 
then  becomes  a  "live"  document,  superseding  the  requisition, 
which  is  now  filed.  It  includes  a  number,  a  date,  and  reference  to 
the  requisition  number  on  which  it  is  based  (for  convenience  in 
referring  back  to  the  latter).  It  may  contain  an  acknowledge- 
ment stub,  to  be  returned  by  the  firm  receiving  the  order  with 
its  acceptance  of  all  of  the  conditions  of  the  order.  This  stub 
will,  when  received  by  the  purchaser,  be  attached  to  his  copy 
of  the  order.  The  purchase  order  states  what  is  wanted,  the 
price  and  discount,  the  shipping  instructions,  the  time,  place 
and  manner  of  delivery,  and  gives  any  necessary  special  instruc- 
tions regarding  the  billing  of  the  material.  A  purchase  order 
given  verbally,  as  over  the  telephone,  is  of  course  immediately 
confirmed  in  the  usual  form,  marked  "confirmation/' 

These  orders  are  filed  in  sequence  according  to  the  specified 
dates  of  delivery  of  the  materials.  At  some  established  interval 
of  time  prior  to  such  specified  date  (in  the  case  of  important 
materials)  inquiry  is  made  of  the  shipper  regarding  delivery 
probabilities.  At  any  rate,  action  of  this  sort  is  taken  as  soon 
as  the  delivery  date  is  reached.2  A  copy  of  the  purchase  order 
(not  necessarily  with  complete  price  notations)  may  go  to  the 
stores  department  for  its  checking  and  information.  The  pur- 

1  Probably  everyone  is  familiar  with  the  type  of  price  cipher  commonly  used  by  retail 
merchants.     Take  any  word  or  combination  of  words  aggregating  ten  letters,  and  let  each 
letter  represent  a  numeral.     Thus: 

BLACK  HORSE 

12345  67890 

On  the  condition  that  no  letter  appears  twice,  each  letter  has  a  definite  numerical  signifi- 
cance. A  notation  of  a  price  of  $275  would  then  appear  as  LOK,  and  no  one  unfamiliar  with 
the  cipher  would  grasp  its  significance. 

2  This  illustrates  what  is  commonly  referred  to  as  a  "follow-up"  system. 


60  WORKS  MANAGEMENT 

chase  order  is  a  live  document  until  the  goods  have  been  received 
and  the  invoice  therefor  approved. 

The  invoice  or  bill  for  the  goods,  received  from  the  seller, 
may  be  drawn  off  upon  the  voucher  form  shown  on  page  15, 
or  may  be  stamped  for  proper  entries,  which  should  include  a 
statement  of  order  number  (sometimes  requisition  number  also) , 
date  of  receipt  of  invoice,  approval  of  quantity,  quality  and 
price  of  goods  (date  and  initials  for  each  approval),  name  or 
number  of  standard  account  chargeable,  and  approval  for 
payment.  It  is  not  essential  that  the  approval  of  invoices,  other 
than  with  respect  to  price,  be  committed  to  the  purchasing 
department.  The  matter  is  mentioned  here  because  it  suggests 
itself  here. 

It  is  customary  for  a  cash  discount  to  be  allowed  on  many 
purchases.  For  this  reason,  quick  action  on  invoices  is  neces- 
sary, lest  the  cash  discount  period  may  have  expired. 

If  the  responsibility  for  specified  delivery  of  goods  rests  <  upon 
the  purchasing  department,  the  program  of  action  in  case  of 
deferred  deliveries ,  must  be  carefully  worked  out  here.  Close 
contact  with  dealers  so  that  accurate  information  may  be  at 
hand  as  to  probable  date  of  deliveries;  with  operating  departments 
and  store-room,  so  that  it  may  be  known  how  much  delay  can  be 
tolerated;  and  with  the  general  market,  so  that  the  pros  and 
cons  regarding  cancellation  and  replacing  of  orders  can  be  re- 
viewed in  a  moment :  all  these  are  necessary.  The  buyer  must 
act  quickly,  but  must  never  get  excited. 

In  many  cases,  the  operating  departments  may  wish  to  con- 
sider prices  in  making  preliminary  estimates  for  work  of  produc- 
tion or  construction.  These  prices  should  be  obtained  through 
the  purchasing  department,  and  a  form  of  request  for  prices  may 
be  employed  in  large  plants  for  this  purpose. 

The  buyer  must  thoroughly  know  the  markets  which  he 
enters.  The  trade  papers,  conference  with  other  buyers,  friendly 
relations  with  sellers,  personal  research  into  the  history,  con- 
ditions and  prospects  of  industries  with  which  he  as  buyer  comes 
in  contact — all  of  these  help.  He  is  a  speculator,  and  he  should 
be  at  least  as  well  posted  on  the  market  for  commodities  in 
which  he  speculates  as  is  the  grain  operator  on  weather  condi- 
tions in  the  Northwest.  If  he  is  far-sighted,  he  will  see  many 
opportunities  for  advantage  by  accumulating  staple  stocks  at 
times  of  low  price.  He  must  then  use  his  expert  knowledge  to 


MATERIAL  61 

influence  the  operating  or  store-room  departments  to  anticipate 
their  requirements. 

There  is  no  final  criterion  by  which  to  gauge  the  efficiency  of 
purchasing.  Prices  will  vary  from  uncontrollable  factors.  In 
engineering  works,  it  has  been  found  that  in  a  general  way 
prices  fluctuate  with  that  of  pig-iron.  A  record  of  such  latter 
fluctuations  may  therefore  be  kept  and  occasionally  compared 
with  variations  in  average  price  of  commodities  consumed.  In 
other  industries,  some  alternative  standard  staple  might  be  con- 
sidered as  a  basis  for  comparisons. 

INSPECTION 

A  low  range  of  unit  prices,  with  high  rates  of  consumption, 
implies  that  the  buyer  is  disregarding  quality  in  his  effort  to 
reduce  price.  This  is  a  matter  for  executive  control.  Impor- 
tant materials  (except,  unfortunately,  coal)  are  now  to  a  great 
extent  purchased  on  the  basis  of  specifications  of  quality  pre- 
pared by  men  having  the  necessary  special  knowledge.  A  check- 
ing of  quality  then  becomes  as  definite  a  matter  as  a  checking  of 
measure  or  weight.  This  checking  should  be  performed  by 
trained  men  and  in  the  laboratory.  Shop  conditions  are  too 
variable,  and  shop  time  is  too  expensive,  for  quality  to  be  deter- 
mined, excepting  in  exceptional  cases,  by  "service  tests  "- 
which  can  scarcely  be  called  tests  at  all.  Any  well-managed 
works  will  have  its  testing  laboratory  and  its  standard  specifica- 
tions for  quality;  and  the  determination  of  compliance  with 
specifications  will  rest  with  the  laboratory  staff. 

CENTRALIZED  BUYING 

In  organizations  of  controlling  magnitude,  a  central  executive 
office  may  include  a  purchasing  department  which  has  staff 
jurisdiction  over  all  the  works.  In  such  cases,  the  purchasing 
department  will  often  need  to  have  a  local  staff  in  each  works, 
for  conducting  small,  emergency  or  necessarily  local  buying. 
The  degree  of  freedom  of  action  to  be  allowed  these  local  staffs 
is  a  debatable  matter,  to  be  determined  by  such  considerations 
as  the  size  of  the  works  and  its  location  and  comparative  degree 
of  isolation.  This  question  is  largely  one  of  policy.  In  any  case, 
copies  of  all  purchase  orders  issued  by  the  local  staff  should  go  to 
the  general  office. 


(52  WORKS  MANAGEMENT 

PURCHASING  PROBLEMS 

Ordering  Without  Prices. — A  large  buyer  who  is  well  posted  on 
the  market  and  of  strong  personality  may  place  many  orders 
(particularly  for  unimportant  materials)  without  explicit  refer- 
ence to  price.  He  "does  his  hammering  after  the  bill  comes  in," 
and  does  it  so  effectively  that  his  work  is  often  quite  as  closely 
conducted  as  that  of  the  routine  man  who  would  not  buy  a  paper 
of  tacks  without  two  or  more  bids. 

Approval  of  Inferior  Goods. — There  is  always  a  chance  that  a 
dishonest  seller  and  a  dishonest  employee  may  get  together  with 
a  view  to  passing  defective  material  to  the  advantage  of  both  and 
the  detriment  of  the  buyer.  Systematic  detailed  records  of  the 
findings  of  inspectors,  and  subdivision  of  the  work  of  inspection, 
have  made  this  chance  a  rather  remote  one;  and  it  is  seldom  that 
any  large  loss  will  be  experienced  from  this  cause,  because  there 
are  too  many  departments  or  individuals  likely  to  be  affected  by 
the  acceptance  of  bad  material. 

Graft  in  the  Purchasing  Department. — If  tales  are  to  be  be- 
lieved, this  was  once  common — almost  a  part  of  accepted  good 
practice!  Gifts  of  wines,  cigars,  and  other  commodities  to 
favorably  influence  the  buyer  toward  the  seller  have  for  the  most 
part  been  eliminated  because  of  the  spirited  contest  between 
these  two  men  brought  about  by  modern  competitive  conditions. 
The  purchasing  agent  holds  his  position  because  he  is  a  close 
buyer,  and  he  cannot  afford  to  impair  his  efficiency  for  some 
trifling  bribe — to  sell  his  birthright  for  a  mess  of  pottage. 

Improper  influences  in  industrial  buying,  on  a  much  larger 
scale,  may  still  exist.  When  a  leading  member  of  the  board 
of  directors  has  commercial  relations  with  a  supply  business  it  is 
often  easy  for  him  to  exert  a  tremendous  pressure  on  the  pur- 
chasing agent  who  must  regard  him  as  one  of  his  superior  officials. 
For  example,  the  director  of  an  automobile  manufacturing  com- 
pany may  own  a  works  which  makes  tires.  He  would  of  course 
like  to  sell  his  tires  to  the  automobile  concern;  in  many  cases 
he  does  not  hesitate  to  ask  (even  in  writing)  that  the  purchasing- 
agent  "give  the  business"  to  his  concern.  If  the  director  were 
individually  the  owner  of  both  the  automobile  plant  and  the 
tire  works,  there  could  be  no  injustice  in  it;  if  he  is  a  principal 
owner,  the  question  is  debatable,  but  it  is  not  usually  considered 
"  good  business"  to  interfere  in  this  way.  If  he  is  simply  one  of 


MATERIAL  (53 

a  large  number  of  stockholders,  the  procedure  is  absolutely 
dishonest.  It  may  be  winked  at  by  other  directors  because  they 
have  their  own  special  irons  in  the  fire.  The  purchasing  agent 
may  feel  that  he  cannot  question  the  wishes  of  a  superior.  The 
remedy  is  in  permanent  and  authoritative  organization.  If  a 
president  is  in  absolute  charge,  as  he  should  be,  he  will  not  toler- 
ate, bnd  he  will  protect  his  subordinates  from,  such  improper  in- 
fluences as  have  been  described. 

Speculation. — It  would  be  foolish  for  a  buyer  not  to  profit  by 
anticipation  of  market  fluctuations.  His  competitors  speculate 
to  their  advantage,  and  so  must  he.  But  his  main  business  is 
not  speculation,  and  when  he  buys  largely  in  anticipation  of 
future  requirements  he  must  be  ultra-conservative,  weighing 
interest  charges  against  the  probability  of  a  rising  market,  and 
giving  due  importance  to  probable  future  operating  conditions. 
For  him,  speculation  must  be  a  science;  his  losses  must  be  ex- 
ceedingly few  and  small. 

In  certain  industries — as  in  the  manufacture  of  linseed  oil — 
the  conditions  are  such  that  it  may  be  necessary  occasionally 
even  to  sell  raw  material  or  buy  the  product.  In  the  particular 
business  mentioned,  this  is  largely  due  to  the  comparatively 
small  supply  of  flaxseed — less  than  $100,000,000  would  usually 
buy  a  year's  world's  crop  outright.  One  effect  of  such  extreme 
speculation  as  this  is  that  it  naturally  engrosses  the  buyer's  entire 
attention,  so  that  ordinary  purchasing  and  the  important  prob- 
lems relating  to  mill  operation  should  be  religiously  kept  in  other 
hands. 

Status. — The  purchasing  agent  was  formerly  one  of  the  "gilt 
edged"  officials,  ranking  almost  with  the  elective  officers  of  the 
directorate  and  considerably  above  the  works  manager.  Con- 
sideration of  his  function  in  the  productive  machinery  suggests 
that  he  should  rank  with  the  supervisor  of  plant  operation  and 
under  the  general  manager.  If  an  honest  administration  is 
expected,  he  should  not  be  too  close  to  the  unpaid  and  otherwise 
interested  directorate. 

Jockeying. — Very  few  orders  are  placed  at  the  price  quoted 
by  the  would-be  seller.  The  Methodist  ideal  of  avoiding  "many 
words  in  buying  and  selling"  has  not  yet  prevailed,  although 
among  the  more  substantial  interests — particularly  in  engineering- 
lines — it  is  more  common  than  it  was  a  dozen  years  ago.  The 
"strictly  one-price"  plan  would  be  economical  in  time  and  trouble. 


64  WORKS  MANAGEMENT 

There  are  two  grounds  for  dickering  as  to  price.  The  first  is 
legitimate.  It  may  be  that  dealers  can  suggest  modifications  of 
specification  that  will  be  immaterial  to  the  buyer  and  which  may 
yet  permit  of  a  reduction  in  price. 

The  other  ground  is  that  of  the  buyer  who  tempts  or  threatens 
the  seller  into  a  concession — pure  hoggishness  (to  use  a  highly 
appropriate,  if  inelegant  word).  One  purchasing  agent  used 
to  keep  careful  records  of  quoted  prices  and  those  at  which 
purchases  were  made.  At  the  close  of  each  day's  business  he 
spent  a  few  moments  summing  up  the  differences  between  the 
two,  then  announcing  the  total  as  what  he  had  "  saved  the 
company  that  day."  It  is  doubtful  whether  he  saved  the  com- 
pany much,  because  sellers  soon  learn  that  a  certain  buyer  ex- 
pects concessions  from  prices  first  quoted. 

When  two  or  three  prices  on  stated  goods  have  been  obtained 
from  different  firms,  the  negotiation  for  a  lowering  of  price1  often 
begins  with  a  lie.  Some  men  are  scrupulous  about  making  a 
direct  false  statement,  but  will  exert  themselves  strenuously  to 
produce  the  desired  false  impression  otherwise.  Such  men 
ought  not  to  be  buyers.  In  some  cases,  however,  the  dickering 
is  taken  up,  not  with  the  lowest  bidder,  but,  say,  with  the  next  to 
the  lowest.  He  can  be  told,  of  course,  that  he  must  cut  his 
price  if  he  is  to  receive  the  order.  If  he  does  cut  it,  the  buyer 
may  then  send  for  the  former  lowest  bidder,  who  has  perhaps 
now  become  second  lowest;  and  so  the  game  of  see-saw  goes  on. 

In  a  contracting  business,  there  is  a  sort  of  unwritten  law 
that  if  the  contractor  uses  in  preparing  a  bid  a  price  given  him 
by  some  material  man  he  should  give  the  order  to  that  man  in 
case  he,  the  contractor,  receives  the  contract.  Thus,  if  Smith, 
who  erects  steam  piping,  gets  the  lowest  prices  on  gate  valves 
from  Brown,  and  uses  that  price  in  making  up  his  bid,  then 
when  he  gets  the  job,  Brown  should  get  the  gate  valves.  From 
every  standpoint,  therefore,  close  attention  is  given  by  con- 
tractors to  the  matter  of  price  on  sub-contracts  or  on  material, 
before  the  estimate  is  made;  and  it  is  at  this  period,  in  such  work, 
that  jockeying  goes  on  most  actively. 

Emergency  Purchasing. — Sometimes  in  case  of  accident  or 
other  sudden  emergency,  a  short  cut  must  be  taken,  the  red  tape 
cut,  and  a  purchase  made  informally  without  regard  to  price. 

1  A  delay  in  acknowledging  quotations  will  often  result  in  a  call  from  the  seller  which  may 
start  this  negotiation. 


MATERIAL  65 

In  such  cases  a  special  report  should  be  made  of  the  nature  of 
the  emergency,  the  reason  why  the  purchase  was  necessary,  the 
probable  excess  cost  due  to  the  informality,  and  the  estimated 
money  value  of  the  gain  due  thereto. 

THE  PLACE  OF  THE  STOREROOM 

Physically,  the  storehouse  is  a  place  where  raw  or  finished 
materials  may  be  safely  kept.  The  materials  include  both  ordi- 
nary standard  stock  and  special  supplies,  parts  or  products. 
They  are  kept  partly  in  the  storeroom  proper,  and  partly  in  the 
yard  or  in  branch  stockrooms  at  the  different  departments;  but 
in  theory  at  least  they  are  all  under  the  control  of  the  stores 
department. 

Nearly  every  business  requires  some  rudimentary  form,  at 
least,  of  stores  department.  If  for  no  other  reason,  there  must 
be  a  place  provided  for  the  keeping  of  such  supplies  as  may  be 
needed  in  the  repair  and  maintenance  of  the  plant.  Some 
materials  are  so  costly  that  they  must  be  specially  housed 
and  guarded.  If  any  attempt  whatever  is  made  to  keep  stock 
costs,  the  stores  department  is  necessary  in  order  that  materials 
consumed  may  be  properly  accounted  for.  Were  there  but  one 
productive  depaifoient,  the  storeroom  organization  might 
possibly  be  reduced  to  a  simple  staff  which  should  merely  keep  a 
record  of  the  amount  of  material  on  hand,  obtaining  from  this 
record  and  the  invoices  for  material  purchased  a  statement  of 
consumption.  But  when  materials  go  to  various  departments 
(and  practically  speaking,  in  all  cases)  the  storeroom  force  is 
responsible  for  their  care  from  their  entry  into  the  works  until 
they  have  been  charged  against  specific  items  or  units  of  product. 

The  storeroom,  thoroughly  organized,  is  concerned  with  three 
classes  of  material:  raw  supplies,  whether  standard  or  special, 
all  of  which  are  first  charged  to  the  stores  department;  work  in 
transit  from  one  department  to  another  in  partly  finished  con- 
dition, or  parts  stored  for  future  assembly;  and  finished  parts 
awaiting  shipment,  all  of  which  also  pass  through  the  stores 
department,  so  that  the  cycle  of  production,  so  far  as  materials 
are  concerned,  begins  and  ends  there. 

STOREROOM  ACCOUNTS 

Most  purchase  order  requisitions  (sometimes  all  of  them)  will 
originate  in  the  storeroom.  If  these  are  for  unusual  or  special 


66  WORKS  MANAGEMENT 

material,  the  initial  suggestion  therefor  may  come  from  design- 
ing or  operating  departments.  Ordinary  stock  material  will  be 
kept  on  hand  in  the  required  amounts  without  formal  reference 
to  operating  departments,  small  stock  being  kept  in  bins,  larger 
materials  in  floor  or  yard  sections.  For  each  bin  or  section  a 
perpetual  inventory  will  be  kept.  Original  entries  of  storeroom 
accounts  may  well  be  made  on  stock  cards,  one  of  which  will  be 
provided  for  each  bin  or  kind  of  material.  On  this  card,  receipts 
will  be  debited,  deliveries  to  operating  departments  will  be 
credited.  A  pencil  '  'balance"  may  be  noted  each  time  an  entry 
is  made.  At  the  top  of  the  card  may  be  a  memorandum  of  the 
minimum  (and  possibly  the  maximum)  limit  of  stock  to  be 
kept  on  hand.  When  the  penciled  "balance"  figure  approaches 
this  minimum,  a  requisition  for  new  supplies  is  sent  to  the  pur- 
chasing department.  Sometimes  two  minimum  quantities  are 
specified:  the  '  'ordinary/'  and  the '  'rush"  or '  'danger"  minimum. 
When  the  latter  is  reached,  in  consequence  of  delay  in  placing  or 
filling  purchasing  orders,  or  for  any  other  reason,  quick  action  is 
called  for. 

These  storeroom  accounts  do  not  appear  on  the  regular  office 
books  of  record,  excepting  that  they  may  give  the  data  for  a 
stock  inventory  when  one  is  required.  They  illustrate  factory 
accounting  as  distinguished  from  commercial  accounting.  It 
may  sometimes  be  desirable  that  such  accounts  be  kept  in  terms 
of  quantity  alone,  values  being  disregarded,  and  such  values 
being  kept  in  the  possession  of  the  office  accounting  force  only. 

The  function  of  the  storeroom  in  approving  invoices  as  to 
date  of  receipt  of  goods,  and  their  approval  as  to  quantity  and 
(in  a  general  way)  as  to  quality,  has  already  been  suggested. 
As  an  alternative  and  perhaps  preferable  plan,  the  stores 
department  may  report  daily  as  to  goods  received,  giving  de- 
scription, quantity,  condition,  quality  (?),  origin,  etc.  These 
reports  will  give  the  purchasing  department  the  necessary  data 
for  approval  of  invoices,  which  then  need  not  leave  the  business 
office. 

A  systematic  plan  for  maintaining  suitable  stocks  not  only 
ensures  against  waiting  for  material;  it  also  permits  of  greatly 
economizing  in  carrying  charges  (interest  on  money)  by  avoiding 
the  maintenance  of  unnecessarily  large  stocks.  When  one  large 
corporation  was  organized,  including  some  ten  works  none  of 
which  had  anything  like  an  adequate  stores  department,  a 


MATERIAL  67 

general  supervisor  of  stores  was  appointed  and  allowed  to  organ- 
ize a  storeroom  staff.  Within  one  year,  the  average  investment 
in  materials  was  reduced  from  $6,000,000  to  $1,500,000,  represent- 
ing a  saving  (with  interest  at  5  per  cent.)  of  $225,000  per  year. 
This  was  a  saving  through  system  alone.  No  appreciable  ex- 
penditure for  equipment  was  involved. 

STOCK  DESPATCHING 

In  the  operation  of  a  railroad,  one  of  the  most  intricate  and 
fascinating  parts  of  the  work  is  the  despatching,  or  centralized 
control  of  the  movement  of  trains.  The  train  despatcher,  by 
the  telegraph  and  other  aids,  must  put  each  train  in  its  proper 
place  at  the  proper  time  designated  by  the  time-table,  or  if  this 
in  an  emergency  be  impossible,  he  must  temporarily  improvise  a 
new  time-table  which  then  becomes  his  ideal  until  the  emergency 
has  passed.  The  fundamental  principle  of  his  work  is  that  no 
two  bodies  may  occupy  the  same  space  at  the  same  time. 

In  an  industrial  works,  there  must  be  a  similar  despatching 
system.  It  begins  with  a  time-table  (usually  called  a  "schedule"), 
establishing  dates  for  definite  steps  of  progress  and  for  completion 
and  shipment  of  each  piece  of  work  on  order.  Despatching 
instructions  based  on  this  time-table  take  the  forms  of  work 
orders,  issued  to  department  foremen,  and  stock  orders,  issued  to 
the  storeroom.  The  order  to  the  foreman  gives  the  number  of 
the  production  order,  the  number  or  designation  of  the  part  to 
be  made,  the  dates  of  commencement  and  completion  of  the  pro- 
posed work,  the  operation  to  be  performed,  numbers  of  drawings 
or  specifications  to  be  referred  to,  the  names  of  the  departments 
from  which  he  is  to  receive  his  raw  material  and  to  which  he  is  to 
deliver  his  finished  product,  and  (where  the  planning  is  managed 
with  great  detail)  the  number  of  the  machine  on  which  the 
work  is  to  be  done. 

The  slip  sent  to  the  storeroom  will  specify  the  production  order 
number,  the  material  wanted,  the  department  to  which  it  is 
to  be  delivered,  and  the  date  on  which  it  is  to  be  delivered.  A 
similar  slip  covering  tools  to  be  used  may  be  sent  to  the  toolroom. 

For  every  finished  or  partly  finished  piece,  some  successive 
department  must  give  its  receipt,  this  receipt  becoming  then  the 
warrant  for  a  charge  against  that  department.  No  piece  work 
payment  will  be  made  for  work  not  covered  by  such  a  receipt. 


68  WORKS  MANAGEMENT 

The  office  planning  department  may  maintain  a  schedule  or 
routing  board  containing  a  schedule  card  for  each  machine  in  the 
works  (sometimes  for  each  man  also),  so  that  a  glance  at  a 
machine  card  will  tell  on  what  order  it  is  working  to-day,  or  will 
be  working  ten  days  hence. 

Such*  a  stock  despatching  system  is  particularly  important  in 
connection  with  assembly  work,  where  enormous  delays  and 
losses  are  common,  though  often  unsuspected  by  the  authorities. 
In  one  machine  shop,  a  force  of  13  men  was  able  to  assemble 
20  machines  per  month,  havig  a  gross  value  of  $10,000.  The 
introduction  of  a  despatching  system  is  stated  to  have  reduced 
this  force  to  6  men,  who  made  a  record  in  the  assembling  of 
100  somewhat  smaller  machines  in  one  month,  the  gross 
value  of  these  being  $35,000. 

An  important  individual  in  the  despatching  system  is  the 
"stock  tracer"  or  "chaser."  Besides  constantly  checking 
scheduled  against  actual  performance  dates,  and  actively 
interesting  himself  in  the  emergency  despatching  which  is 
frequently  necessary  because  of  unanticipated  delays,  he  investi- 
gates those  things  which  workmen  (and  sometimes  foremen) 
are  prone  to  cover  up,  such  as  the  reasons  for  delayed  schedules, 
or  the  number  of  pieces  or  parts  spoiled  or  lost,  and  the  reason 
therefor.  He  also  keeps  posted  on  the  stages  of  completion  of 
parts  in  the  machines,  so  that  he  can  tell  how  much  the  hands 
of  the  clock  must  be  set  back,  in  any  department,  to  make  the 
ideal  time-table  correspond  with  actual  conditions. 

THE  STORES  DEPARTMENT  IN  THE  MECHANISM  OF  PRODUCTION 

In  one  company,  the  purchasing  and  works  departments  are 
managed  by  one  vice-president,  the  correspondence  and  engi- 
neering departments  by  another.  All  orders  from  customers 
come  to  the  correspondence  department,  which  bases  "general 
orders"  thereon.  The  underlying  theory  of  the  organization  is 
that  all  shipments  are  made  from  stock.  All  general  orders 
are  consequently  sent  to  the  storekeeper.  He  in  turn  maintains 
his  stock  by  issuing  a  stock  order,  which  is  really  a  production 
order,  copies  being  sent  to  the  engineering,  manufacturing  and 
cost-keeping  departments.  When  the  general  order  is  received 
at  the  storeroom,  a  notation  is  made  thereon  as  to  assembly 


MATERIAL  69 

materials  (a)  in  stock  or  (6)  to  be  made  under  a  stock  order. 
A  copy  of  this  notation  goes  back  to  the  correspondence  depart- 
ment. 

The  engineering  department,  upon  receipt  of  its  copy  of  a 
stock  order,  issues  a  list  of  raw  material  required;  copies  of  which 
go  to  the  manufacturing,  stores  and  cost  departments.  Requisi- 
tions for  this  material  are  made  upon  the  stores  department  by 
•the  foremen  of  the  operating  departments  concerned.  The 
perpetual  inventory  of  raw  materials  enables  the  storeroom  to 
issue  purchase  requisitions  to  the  buyer  when  necessary.  Copies 
of  these  are  sent  to  the  receiving  clerk  (an  employee  of  the 
stores  department)  with  instructions  telling  him  where  to  place 
such  new  material  when  received.  This  clerk  reports  all 
receipts. 

The  engineering  department  furnishes  the  manufacturing 
department,  for  each  shop  order,  with  a  list  of  drawings  and 
specifications  applicable,  together  with  a  schedule  or  plan  of 
successive  operations  under  which  the  work  is  to  be  done; 
this  schedule  being,  however,  undated.  For  new  designs,  a 
''stock  order "  covering  the  design  is  issued  to  the  drafting- 
room,  and  this  work  of  design  is  scheduled  in  precisely  the 
same  way  as  shop  work. 

The  dating  of  the  routing  schedule  is  done  by  the  production 
clerk  of  the  assembly  department,  who  checks  this  schedule  in 
its  entirety  every  day.  When  the  work  is  completed,  the  manu- 
facturing department  delivers  its  output  to  the  store-house, 
taking  a  receipt  therefor,  and  notifying  the  cost  department. 
A  perpetual  inventory  is  maintained  of  finished  parts  and  prod- 
ucts, and  abstracts  of  this  are  sent  weekly  to  the  manufacturing 
and  sales  departments. 

The  system  is  open  to  some  criticism,  particularly  because  it 
has  been  built-up  rather  than  devised  as  a  complete  entity. 
As  depicted,  it  represents  the  evolution  of  15  years,  during 
which  the  output  of  the  works  has  increased  1000  per  cent. 

ECONOMY  IN  MATERIALS 

This  subject  is  as  broad  as  the  whole  field  of  applied  science. 
It  is  in  this  direction  that  manufacturing  is  the  special  work 
of  the  chemist  and  the  engineer.  A  very  brief  presentation  is 
all  that  can  be  offered  here. 

The  essential  thing  in  the  utilization  of  material  is  to  consider 


70  WORKS  MANAGEMENT 

what  it  is  that  we  utilize.  In  coal,  it  is  the  heat  unit,  in  the  wood 
which  comes  to  a  pulp  mill  it  is  (mainly)  the  fiber,  in  commercial 
fertilizers,  it  is  nitrogen,  phosphoric  acid  or  potash.  It  is 
seldom  the  case  that  the  material  as  we  buy  it  is  really  the  thing 
that  we  want.  What  we  must  do  is  to  determine  the  thing  we 
want  and  then  to  study  that  thing  in  all  of  its  associations, 
transformations  and  final  dispositions,  with  a  relentless  scrutiny. 
A  good  illustration  of  this  point  would  necessitate  great 
familiarity  on  the  part  of  both  writer  and  reader  with  some  one 
industry.  A  fairly  satisfactory  illustration  of  what  is  meant 
may  be  obtained  from  the  ten  items  of  coal  loss  in  railroad  service 
as  suggested  by  Mr.  Harrington  Emerson: 

(1)  Coal  charged  by  mine,  but  never  placed  in  car. 

(2)  Coal  shrinkage  in  transit. 

(3)  Coal  lost  in  unloading. 

(4)  Coal  shrinkage  in  storage. 

(5)  Coal  lost  in  loading  locomotive. 

(6)  Coal  wasted  in  firing  up  and  banking  fires. 

(7)  Coal  lost  through  wasteful  firing. 

(8)  Coal  lost  through  wasteful  running. 

(9)  Coal  burned  while  standing  at  stations  or  on  side  tracks. 
(10)  Coal  lost  to  ash  dump. 

Items  (7)  and  (8)  are  of  course  capable  of  great  subdivision, 
and  this  subdivision  should  be  made.  Under  item  (4) ,  there  is 
a  loss  both  of  quantity  and  of  quality.  All  of  the  elements  of 
loss  should  of  course  be  finally  computed  in  heat  units. 

Good  management  in  the  use  of  materials  involves  special 
training  in  the  industry  under  consideration,  or  in  some  in- 
dustry closely  resembling  it.  It  is  one  of  the  particular  func- 
tions of  the  works  supervisor  as  distinguished  from  the  gen- 
eral manager.  There  is  an  art  of  management,  irrespective 
of  application  to  any  particular  business.  This  has  been  long 
and  generally  recognized,  men  who  have  shown  efficiency  in  the 
general  administration  of  one  business  being  often  entrusted 
with  the  affairs  of  some  distinctly  different  business  in  an 
equally  responsible  capacity.  These  men  are  managers,  not 
oil-mill  or  paper-mill  men.  The  latter  they  employ. 

That  an  art  of  management  exists  is  perhaps  the  main  con- 
tention (possibly  an  undisputed  thesis)  of  this  book.  Yet  it  is 
equally  true  that  experience  rules  and  that  in  the  last  analysis 


MATERIAL  71 

the  workability  of  plans  must  depend  upon  their  approval  and 
execution  by  the  works  superintendent,  the  man  who  is  trained 
and  expert  in  his  particular  business.  He  it  is  whose  enthusiasm 
and  flexibility  must  not  be  impaired  by  half-baked  notions 
originating  with  the  untrained  staff  of  the  economist.  We 
must  maintain  his  prestige.  He  is  the  most  useful  man  of  us 
all.  We  must  make  him  more  rather  than  less  useful  by  making 
his  cooperation  the  matter  of  first  importance  at  every  step.  It 
is  he  who  is  the  knight  of  the  chessboard. 


CHAPTER  VI 
BURDEN 

In  the  case  of  an  industry  which  produces  one  single  invariable 
staple  product — say-  a  city  electric  railway,  which  turns  out 
passenger-miles  or  passenger-trips  as  its  exclusive  output — 
there  is  perhaps  no  reason  for  any  separation  between  direct  and 
indirect  expenses.  All  expenses  are  divisible  by  the  number  of 
invariable  units  of  product.  But  such  industries  are  rare,  and 
consequently  we  must  in  the  great  majority  of  cases  separately 
consider  two  classes  of  costs: 

(a)  Those  which  are  directly  chargeable  against  a  specific  item 
of  production;  labor,  materials  and  direct  expense. 

(b)  Those  which  are  not  directly  so  chargeable. 

The  latter  class  may  include  the  roughly  classified  items. 

Factory  Expense. 

Direct: 

Rent. 

Light. 

Heat. 

Power. 

Foremen  and  supervisors. 

Non-productive  labor. 

Repairs  and  replacements. 

Depreciation. 

Insurance. 

Taxes. 
Indirect: 

General  management. 

Office  rent,  light,  heat  and  power  (factory  office). 

Factory  office  salaries  and  supplies. 

Selling  Expense. 

Salesmen's  salaries,  expenses  and  commissions. 
Freight  and  drayage  on  outgoing  product- 
Rent,  light  and  heat  for  salesrooms. 

72 


BURDEN  73 

Administrative  Expense. 

Officers'  and  office  salaries,  supplies  and  expenses. 
Rent,  light  and  heat  for  general  office. 

There  is  no  danger,  generally  speaking,  that  the  accountants 
will  forget  to  charge  these  expenses  against  production;  they 
appear  on  invoices  exactly  like  charges  for  labor  or  materials. 
The  danger  (and  the  problem  to  be  considered)  is  one  of  distri- 
bution. In  what  manner  and  proportions  shall  these  charges  be 
finally  applied  against  specific  production  orders?  If  not  prop- 
erly applied,  actual  costs  and  proper  selling  prices  will  not  be 
ascertained. 

The  words  burden,  surcharge,  expense,  indirect  expense,  general 
expense,  will  be  regarded  as  synonymous  for  our  present  purpose, 
as  covering  all  costs  of  the  nature  indicated.  The  term  fixed 
expense  is  more  properly  used  to  describe  such  unvarying  charges 
as  interest  on  bonds,  which  go  on  absolutely  regardless  of  output. 
This  chapter  deals  with  methods  of  distributing  burden  or  expense 
charges. 

DEPARTMENTAL  DIVISION 

Where  a  plant  is  divided  into  departments  in  each  of  which 
there  may  be  established  some  satisfactory  unit  of  product,  the 
direct  factory  expense  items  may  usually  be  separated  so  that 
(as  far  as  this  part  of  the  burden  is  concerned)  each  department 
will  bear  its  proper  share.  The  indirect  factory,  administration 
and  selling  expenses  may  then  be  distributed  in  a  more  or  less 
arbitrary  way,  on  the  basis  of  the  value  of  departmental  product, 
the  number  of  men  employed,  or  by  different  bases  for  different 
items  of  burden. 

As  an  example,  let  there  be  three  departments.  The  first 
turns  out  1000  kegs  of  nails  and  employs  100  men.  Its  costs 
are,  for  labor,  materials,  direct  expense  and  "  factory  expense 
(direct),"  $1200.  In  the  second  department,  the  figures  are 
1500  kegs  of  spikes,  75  men,  $2250  cost;  and  in  the  third,  500 
kegs  of  staples,  50  men,  $600  cost.  Let  the  "indirect  factory," 
" selling"  and  " administration"  expenses  aggregate  $4500,  and 
let  the  basis  for  distribution  of  these  be  the  number  of  men 
employed.  The  total  number  of  men  being  225,  the  burden 
per  man  is  $4500  -r-  225  =  $20,  and  the  departmental  burdens  are 
respectively  $2000,  $1500  and  $1000.  The  departmental  costs 


74  WORKS  MANAGEMENT 

corresponding  then  total  $3200  or  $3.20  per  keg,  $3750  or  $2.50 
per  keg  and  $1600  or  $3.20  per  keg. 

UNIT  DIVISION 

If  the  total  production  is  100,000  units,  the  direct  cost  $1000 
and  the  indirect  cost  $500,  the  total  cost  is  obviously  $1500  or 
1  1/2  cents  per  unit.  If  —  as  in  a  linseed-oil  mill  —  there  are 
made  various  special  products  in  addition  to  the  principal 
staple,  then  some  of  the  burden  should  be  placed  upon  these 
specialties.  An  analysis  of  direct  costs  might  show  a  cost  per 
gallon  for  raw  oil  in  tanks  of  40  cents,  the  cost  in  barrels  being 
42  1/2  cents.  Suppose  500,000  gallons  of  each  to  have  been 
produced,  and  that  the  whole  burden  is  $5000.  It  would  not  be 
fair  to  add  1/2  cent  per  gallon  to  the  cost  of  each  kind  of  oil  to 
absorb  the  burden,  for  the  oil  in  barrels  has  required  not  only 
all  of  the  equipment,  indirect  labor  and  supervision  of  the  tank 
oil:  it  has  in  addition  required  special  expenditure  of  its  own  in 
these  directions.  To  some  extent,  these  expenditures  may  be 
ascertained;  we  may  compute,  for  example,  the  cost  of  light, 
heat  and  power  for  the  cooperage  shop;  but  administrative  and 
selling  expenses  cannot  be  ascertained  separately,  and  about  the 
only  practicable  basis  for  distribution  would  be  to  burden  each 
class  of  oil  in  proportion  to  its  aggregate  direct  cost. 

If  the  burden  of  $5000  were  found  to  consist  of  $1000  clearly 
applicable  to  barreled  oil,  with  the  remaining  $4000  undivisible, 
the  total  costs  would  then  be  computed  as  follows: 

TANK  OIL 

Direct  cost,  40  cents;  aggregate  cost,  $200,000.  Since  the 
aggregate  cost  of  the  barreled  oil  is  $212,500,  tank  oil  must  carry 

200  000 

of  the  joint  burden  of  $4000,  or  $1939.39,  amounting  to 


4  l^, 

$0.003879  per  gallon. 

The  total  cost  of  tank  oil  per  gallon  is  then  40.3879  cents. 

BARRELED  OIL 

Direct  cost,  42  1/2  cents;  Departmental  burden,  $1000  or 
1/5  cent  per  gallon;  Share  of  undivisible  burden,  $4000- 
$1939.39  =  $2060.61,  or  $0.00412  per  gallon;  Total  cost  per 
gallon,  43.112  cents. 


BURDEN  75 

DIVISION  ON  THE  BASIS  OF  EQUIVALENT  VALUES 

Where  the  factory  is  neither  departmentally  organized  nor 
engaged  on  staple  product  (this  being  the  usual  condition), the 
problem  is  quite  as  unsatisfactory  of  definite  solution,  and  deci- 
dedly more  difficult  to  attack.  A  plant  makes  a  sewing  machine, 
a  bicycle  and  a  plow.  The  burden  is  $100.  How  much  of  it 
shall  each  of  the  three  things  stand? 

One  method  of  division  is  to  consider  the  money  values  of  the 
three  things:  or,  what  is  easier  to  determine,  the  costs  for  labor, 
materials  and  direct  expense.  Suppose  these  three  charges  to 
have  aggregated  $15,  $22  and  $13,  respectively:  a  total  of  $50. 
The  burden  then  amounts  to  $2.00  per  $1.00  of  direct  charge. 
It  would  be  applied,  then,  in  the  proportions,  $30  to  the  sewing 
machine,  making  its  cost  $45;  $44  to  the  bicycle,  making  its 

cost  $66;  and  $26  to  the  plow,  making  its  cost  $39;  total,  $150. 

t 

THE  DIRECT  LABOR  BASIS — TIME 

A  more  common  system  is  to  apportion  burden  charges  in 
proportion  to  the  labor  time  consumed.  If  this  latter  were 
30  hours  for  the  sewing  machine,  50  for  the  bicycle  and  20  for 
the  plow,  the  $100  of  burden  would  amount  to  $1.00  per  hour, 
and  the  burden  charge  would  be  distributed  to  the  three  products 
as  $30,  $50  and  $20,  making  the  total  costs  (with  the  direct 
costs  already  assumed)  $45,  $72  and  $33. 

THE  DIRECT  LABOR  BASIS — VALUE 

Still  another  way  would  be  to  divide  the  burden  on  the  basis 
of  labor  cost.  Suppose  the  labor  costs  to  have  been,  respectively, 
$6.00,  $12.50  and  $6.50,  totalling  $25.  The  burden  is  then  $4 
for  each  dollar  of  labor  cost,  and  results  in  charges  of  $24,  $50 
and  $26  respectively,  making  the  total  costs  $39,  $72  and  $39. 

HORSE  POAVER  AND  TIME  BASES 

The  obvious  objections  to  all  of  these  methods  of  distribution 
have  suggested  others;  to  which,  however,  there  are  objections 
scarcely  less  obvious.  Many  of  the  factory  expense  and  other 
charges  are  related  rather  to  the  machinery  used  than  to  the 
men  employed.  An  estimate  or  measurement  of  horse-power- 


76  WORKS  MANAGEMENT 

hours  consumed  by  the  various  machines  has  been  proposed  as 
a  basis  for  subdividing  surcharge.  Another  plan  is  to  subdivide 
on  the  basis  of  the  time  the  material  is  in  the  works  undergoing 
fabrication.  This  latter  method  virtually  regards  the  sur- 
charge as  a  fixed  expense  unaffected  by  shop  space  conditions. 
It  makes  the  cheap,  bulky  product  appear  relatively  less  expen- 
sive than  the  small,  costly  one.  The  first  mentioned  plan  is  too 
unscientific  to  be  worth  the  expense  and  trouble  it  involves. 

OBJECTIONS  TO  THESE  SYSTEMS 

Not  one  of  these  devices  for  distributing  burden  in  the  case 
of  a  diversified  output  has  any  relation  to  the  true  condition  of 
things.  The  cost  of  power  is  certainly  not  as  a  matter  of  fact 
in  any  way  related  to  corresponding  labor  time  or  labor  cost. 
The  cost  of  fire  insurance  is  equally  without  relation  to  the 
number  of  men  employed;  that  of  supervision  has  no  necessary 
association  with  value  or  cost  of  product.  Certainly  the 
charge  for  office  salaries  does  not  depend  in  any  way  on  the  power 
consumption  or  use  of  shop  time  in  producing  an  item  of  output. 

We  must  then  ask,  upon  what  measurable  factors,  if  any,  does 
overhead  expense  depend?  Not  on  any  one  factor.  Heat — to 
take  an  example — is  in  general1  not  necessary  for  machines, 
but  for  men.  Expense  for  heating  the  factory  is  incurred  be- 
cause men  are  there.  It  is  entirely  logical,  then,  ^o  charge 
cost  of  heating  as  a  surcharge  on  labor  time.  That  is,  if  100 
men  work  10  hours  during  which  a  heating  expense  of  $12.00  is 
incurred,  we  must  charge  against  the  production  of  these  men 
not  only  the  appropriate  wage  per  hour,  but  1.2  cents  per  man 
per  hour  over  and  above  this,  for  factory  heat  alone. 

DISCUSSION  OF  RELATIONSHIPS 

Taking  up  the  burden  items  in  the  order  in  which  they  are 
given  at  the  beginning  of  this  chapter,  we  shall  find  a  large 
proportion  of  the  direct  factory  expense  to  be  thus  related  to 
labor  time,  or  related  with  equal  definiteness  to  machine  time. 
Take  the  case  of  power.  Men  do  not  consume  power,2  machines 

1  The  existence  of  an  automatic  sprinkler  system  in  some  cases  involves  expenditure  for 
warming  buildings  that  would  not  otherwise  be  heated. 

2  A  heating  or  ventilating  fan,  or  a  passenger  elevator,  might  consume  power  chargeable 
.against  labor  time. 


BURDEN  77 

do.  If  we  know  the  amount  of  power  (horse-power-hours) 
consumed  by  each  machine,  during  a  month,  and  also  the  total 
cost  of  power  during  that  month,  we  may  obtain  an  hourly 
rate  of  charge  for  power  on  each  machine.  In  many  cases 
this  may  be  once  determined  experimentally — or  at  least 
the  relative  proportions  of  power  consumed  by  the  various 
machines  may  be  so  ascertained.  As  this  is  a  subject  of  a 
little  complication,  we  will  here  consider  a  rather  elaborate 
illustration. 

Suppose  the  plant  to  contain  three  machines,  which  during 
a  trial  month  consume  4000,  8000  and  18,000  horse-power- 
hours  respectively.  The  corresponding  numbers  of  hours  run 
are  400,  200  and  300,  so  that  the  horse-power  loads  on  the 
three  machines  are  10,  40  and  60.  Suppose  the  output  of  the 
power  plant  during  the  month  to  have  aggregated  35,000 
horse-power-hours.  This  is  somewhat  more  than  the  total 
power  consumptions 'of  the  three  machines;  the  difference  rep- 
resents power  wasted  in  transmission,  or  used  for  running- 
non-productive  machines  like  cranes,  etc.,  and  this  difference 
must  be  of  course  absorbed  in  the  charges  to  the  productive 
machines. 

Let  the  cost  of  power  for  the  month  have  been  $1200.  The 
cost  per  horse-power-hour  of  that  portion  of  power  employed  in 
production  was  then  $  1 200 -f- 30,000  =  4  cents.  We  shall  charge 
the  first  machine  with  4x10  =  40  cents,  per  hour  run,  or  with 
$160.00  for  the  month;  the  second,  with  $1.60  per  hour  run 
or  $320. 00  for  the  month;  and  the  third  with  $2 . 40  per  hour  run 
or  $720.00  for  the  month. 

An  important  point  should  be  mentioned  here.  We  now 
handle  these  power  charges  as  direct  charges,  exactly  like 
labor — charging  each  job  at  so  much  per  hour  for  machine 
time  as  well  as  for  man  time.  Machine  time,  as  we  shall 
find,  involves  costs  additional  to  that  of  power.  The  basis 
for  charges  of  machine  time  will  be  derived  from  the  time 
cards  or  piece  work  slips  (see  Chapter  IV),  which  will  always 
give  the  number  and  time  of  the  machines  employed  on  a 
given  order. 

Now  in  a  following  month,  we  may,  unless  the  power  loads 
on  the  machines  are  quite  variable,  use  the  hourly  power  loads 
already  determined  as  a  basis  of  subdivision.  We  need  make 
no  further  record  of  power  consumption  at  the  individual 


78  WORKS  MANAGEMENT 

machines — the    only    data    necessary   are   the   machine   times 
chargeable. 

Suppose  the  power  cost  in  the  succeeding  month  to  be  $1550; 
the  machine  times  to  be,  respectively,  300,  400  and  200.  Based 
on  the  horse-powers  formerly  ascertained,  the  respective 
power  consumptions  (horse-power-hours)  are  300X10  =  3000, 
400X40  =  16,000  and  200X60  =  12,000;  making  a  total  of 
31,000.  The  cost  per  horse-power-hour  is  now  $1550 -=-3 1,000  = 
5  cents.  The  machine  power  rates  are: 

No.  1,  50  cents  per  hour,  $150  for  the  month; 
No.  2,  $2.00  per  hour,  $800  for  the  month; 
No.  3,  $3 . 00  per  hour,  $600  for  the  month. 


$1550 

The  original  measurement  of  power  consumption  is  easily 
made,  in  the  case  of  motor-driven  machines,  by  a  recording 
electrical  instrument. 

Rent. — This  is  paid  to  provide  space  for  both  men  and 
machines.  In  a  department  which  is  without  (or  largely 
without)  machines,  it  may  be  charged  wholly  against  labor  time. 
In  a  department  full  of  machines  (like  an  ordinary  machine 
shop)  where  a  man  works  as  tender  to  a  machine,  it  should 
constitute  a  part  of  the  machine  time  charge.  In  other  cases 
a  more  or  less  arbitrary  division  may  have  to  be  made,  part  of 
the  rental  cost  being  distributed  in  proportion  to  labor  time 
and  part  in  proportion  to  machine  time. 

Light  is  clearly  chargeable  against  labor  time. 

Foremen  and  supervisors  are  partly  in  charge  of  men  and 
partly  (the  shop  engineering  and  repair  force)  in  charge  of 
machines  and  buildings.  The  cost  of  the  first  class  constitutes 
a  charge  against  labor  time.  The  repair  and  maintenance 
supervision  cost  is  related  partly  to  machine  time,  and  partly 
to  investment  in  machines  and  buildings.  Probably  the  best 
way  of  handling  it  is  to  regard  it  as  a  surcharge  on  distributed 
repair  costs,  the  basis  for  division  being  those  costs  themselves. 
Thus,  suppose  the  shop  engineer  and  assistants  to  receive  $1000 
per  month,  and  the  cost  of  repairs  to  have  totaled  $5000:  $1200, 
$1800  and  $2000  for  three  machines,  respectively.  We  add 
1/5  to  each  of  these  figures,  making  them  $1440,  $2160  and 
$2400,  to  absorb  the  supervision  charge. 


BURDEN  79 

Repairs  and  Replacements. — What  has  just  been  said  will 
suggest  that  these  expenses  should  when  possible  be  charged 
against  individual  machines.  When  a  non-productive  machine 
is  repaired,  the  cost  should  be  absorbed  in  the  same  way  as  that 
of  power  for  such  a  machine,  by  the  charges  against  productive 
machines.  When  a  building  is  repaired,  the  cost  must  be  ab- 
sorbed as  a  charge  like  rent,  by  machines  or  men  or  both. 

Non-productive  Labor. — Such  workmen  as  sweepers,  watchmen 
and  to  a  certain  extent  general  laborers  cannot  in  all  cases 
charge  their  time  to  specific  production  orders.  (Power  house 
employees'  time  is  charged  against  power:  repair  workmen 
charge  their  time  to  repairs).  To  some  extent  these  labor  costs 
may  be  clearly  applicable  to  labor  time,  as  where  a  gang  of  men 
is  engaged  in  bringing  parts  to  an  assembly  room;  or  to  machine 
time,  as  with  a  crane  operator  (the  machine  is  of  course  non- 
productive in  this  case).  Where  there  is  residual  doubt  as  to 
whether  a  non-productive  labor  charge  should  be  placed  against 
labor  time  or  machine  time,  it  must  be  treated  as  one  of  the 
final  indirect  expenses,  as  described  below. 

Depreciation  applies  directly  against  machine  time  only; 
indirectly  (depreciation  of  buildings  containing  no  machinery) 
it  may  apply  against  labor  time.  Further  consideration  of  this 
important  topic  will  be  given  in  the  next  chapter. 

Insurance  is  of  several  kinds:  fire,  boiler,  employees'  liability, 
plate  glass,  etc.  Fire  insurance  covers  buildings,  machinery, 
raw  and  finished  material.  If  that  on  buildings  is  separately 
kept,  it  may  be  treated  like  rent.  Other  forms  of  fire  insurance 
are  grouped  in  the  final  indirect  expenses.  Boiler  insurance  is 
a  cost  chargeable  against  power.  Employers'  liability  insurance 
is  clearly  related  to  labor  time. 

Taxes  are  treated  like  rent. 

Final  indirect  expenses  include,  besides  the  few  refractory 
costs  already  mentioned,  all  indirect  factory,  selling  and  ad- 
ministration charges.  They  are  lumped  and  distributed  as  a 
percentage  surcharge  on  the  otherwise  prime  cost  (in  some  few 
cases,  on  the  labor  cost  only) . 

RECAPITULATION 

The  following  table  then  shows  what  becomes  of  the  listed 
items  of  surcharge,  and  the  distribution  of  elements  constituting 


80 


WORKS  MANAGEMENT 


cost  in  the  light  of  the  present  discussion.     The  list  is  of  course 
incomplete.1 


f  Direct  labor. 
Materials,   (a)   stock,   (b)    \  =  Initial  prime  cost. 

special. 
Direct  expense. 


Total  cost. 


Distributed  burden: 
Charged      against     labor  + 
time. 


Corrected 
prime 
cost. 


Distributed  burden: 
Charged  against  machine 
time     (productive     ma- 
chines only). 


Distributed  burden: 
Charged  against  corrected 

prime     cost     (or    labor 

cost) . 


Wasted  time. 
Taxes  (part). 
Heat. 

Depreciation  (part). 
Light. 

Foremen  and  supervisors. 
Employers'  liability  insurance. 
Rent  (part),  fire  insurance  on  build- 
ings (part). 
(  Non-productive  labor  (part) . 

Power,  boiler  insurance. 
Repairs  and  replacements. 
Repair  supervision. 
Depreciation  (part). 
Rent,  taxes  (part  of  each) . 
Non-productive  labor  (part) . 
[  Fire  insurance  on  buildings  (part) . 


Fire  insurance,  excepting  on  buildings. 

Non-productive  labor  (part). 

Factory  indirect  expenses. 

Selling  expense. 

Administrative  expense. 

Spoiled  work. 

Standard  patterns,  tools,  jigs  and  templates. 

Designing  and  development  expense. 


1  The  following  is  the  list  or  standard  classification  of  factory  burden  expenses  adopted 
by  one  large  corporation: 

Maintenance  of  Property  Expenses. — Main  buildings;  other  structures;  drainage  and  sewer 
pipes;  tracks,  trestles  and  turntables;  roadways  and  grounds;  permanent  shop  fixtures; 
warming  and  ventilating  system;  engines  and  pumps;  accumulators  and  gas  producers; 
boilers;  electric  plant;  electric  motors;  oil,  heating  and  melting  furnaces;  gas,  heating  and 
melting  furnaces;  coal,  heating  and  melting  furnaces;  steam,  gas  and  water  pipes;  pneumatic 
pipes  and  fittings;  hydraulic  pipes  and  fittings;  cranes  and  conveying  machinery;  fixed 
machine  tools;  foundations  and  installation  of  tools;  shafting,  hangers  and  pulleys;  belting, 
renewals;  belting,  supplies;  belting,  labor;  portable  power  tools;  portable  tools,  durable; 
portable  tools,  non-durable;  formers  and  cast  iron  dies;  cast  steel  dies;  metal  flasks;  rolling 
stock;  fire  protective  equipment;  miscellaneous  property. 

Other  Indirect  Factory  Expenses. — Foremen  and  assistants;  power,  heat  and  light:  fuel, 
handling,  purchased,  supplies,  engineers  and  firemen;  other  engineers  and  firemen;  water 
supply;  inspectors;  watchmen;  oil;  waste;  car  rental  and  detention;  testing  material;  ship- 
ments of  patterns ;  wooden  flasks  and  templates ;  cartage  expenses ;  stable  expenses ;  defective 
shop  work;  defective  work  corrected  outside;  defective  purchased  material;  drawing  room 
errors;  changes  conceded  to  purchasers;  loss  on  obsolete  material;  shop  supplies;  shop 
expenses;  unloading  incoming  material;  other  handling  of  material;  storeroom  attendants; 
toolroom  attendants ;  oilers ;  unclassified  labor ;  superintendence ;  special  mechanical  experts ; 
shop  engineering;  traveling  engineers;  production  department,  clerical;  standardizing  engi- 
neering; charts  and  diagrams,  clerical  expense;  accounting,  clerical  expense;  storekeeping, 
clerical  expense;  purchasing,  clerical  expense;  other  office  clerks  and  attendants;  other  shop 
clerks ;  drawing  room  expenses ;  hastening  incoming  material ;  telegraph  expenses ;  telephone 
expenses;  plant  traveling  expenses;  stationery  and  printing;  repairs  of  plant  office  furniture 
and  appliances;  injuries  to  persons;  legal  expenses;  donations  and  gratuities;  taxes;  insur- 
ance on^property;  other  plant  office  supplies;  other  plant  expenses. 


BURDEN  81 

An  examination  of  this  table  will  show  that  there  may  be  some 
justification  for  charging  a  customer  60  to  80  cents  per  hour 
for  the  time  of  a  workman  to  whom  we  actually  pay  in  wages 
only  30  or  40  cents.  If  we  remember  that  interest  charges  have 
not  been  included  here  (the  percentage  of  profit  may  be  regarded 
as  a  substitute  for  interest)  we  may  also  understand  why  ma- 
chine time  charges  of  50  cents  and  upward  per  hour  are  not 
uncommon. 

OBJECTIONS  TO  THE  DEFINITE  SYSTEM 

This  method  of  distributing  surcharge  is  as  definite,  logical 
and  complete  as  any  system  could  be.  The  objection  to  it  is 
on  the  ground  of  its  complication.  As  a  matter  of  fact,  it  is 
complicated  .to  devise  and  first  apply,  but  simple  in  its  con- 
tinued application  after  having  once  been  inaugurated.  If  it 
is  worth  while  to  study  costs  at  all,  it  is  worth  while  to  pursue 
the  study  until  our  knowledge  is  accurate.  It  may  easily  take 
two  or  three  years  to  get  a  system  like  this  in  working  order;  it 
may  need  frequent  modification  and  revision.  Hard  and  fast 
rules  cannot  be  laid  down;  and  in  all  cases  some  simplification 
is  permissible. 


CHAPTER  VII 
DEPRECIATION 

There  is  one  item  of  surcharge  for  which  no  invoice  is  received : 
an  element  of  cost  which  may  be  forgotten,  or  at  least  inade- 
quately estimated.  Fortunately,  however,  when  this  cost — depre- 
ciation— is  ascertained,  there  is  never  any  question  as  to  its  dis- 
tribution. It  applies  to  specific  pieces  of  material  equipment. 
If  these  are  productive  machines,  depreciation  is  a  part  of  the 
machine  time  rate.  If  they  are  non-productive  machines, 
buildings  or  structures,  depreciation  may  be  distributed  in  the 
same  way  as  rent. 

Depreciation^  a  charge  against  production  intended  to  offset 
the  progressive  decrease  in  value  of  equipment  which  experience 
shows  to  be  universal.  Suppose  a  plant  to  be  built  for  a  million 
dollars;  and  to  run  ten  years,  paying  its  owners  $60,000  each 
year,  accumulating  no  surplus  or  reserve  funds.  It  is  then  put 
on  the  market  for  sale;  but  the  highest  price  that  can  be  obtained 
for  it  is  $250,000.  The  owners  thought  they  had  made  $600,000; 
what  they  had  really  lost  was  $150,000.  They  were  paying  the 
cost  of  depreciation  out  of  their  resources  instead  of  out  of  their 
profits.  Depreciation  is  unavoidable;  it  is  a  part  of  the  cost  of 
operation;  our  only  option  is  to  pay  it  out  of  resources  or  out 
of  profits.^The  latter  is  the  only  safe  plan.1 

1  In  this  respect,  the  interests  of  the  bond  holders  of  a  manufacturing  concern  may  differ 
from  those  of  the  stockholders.  The  latter  may  be  regarded  as  partners  in  the  business 
enterprise;  the  former  virtually  (often  actually)  hold  a  mortgage  on  the  physical  property. 
The  stockholder  wants  his  dividends;  he  may  wish  to  sell  out  at  any  time,  and  few  things  keep 
up  the  price  of  stock  like  a  steady  dividend  record.  The  bondholder  cares  comparatively 
little  about  dividends,  or  even  about  profits  in  excess  of  bond  interest  requirements.  He 
is  more  interested  in  seeing  the  value  of  the  plant  maintained  so  that  if  he  should  ever 
have  to  foreclose  his  mortgage  he  may  be  able  to  realize  on  it.  The  stockholder  may  try 
to  ignore  depreciation  and  to  declare  dividends  not  really  earned;  the  bondholder  prefers 
to  see  earnings  "put  back  into  the  property."  The  latter  would  pay  for  depreciation  out 
of  profits;  the  former  might  seek  to  pay  for  it  out  of  resources.  Large  investors  feel  that 
their  bond  holdings  are  safest  only  when  they  have  adequate  stock  holdings  in  the  same 
enterprises.  Many  conflicts  in  management  have  arisen  from  the  diverse  interests  of  bond 
and  stock  owners.  It  must  be  remembered  that  ownership  of  a  bond  gives  its  holder  no 
voice  in  the  control  of  a  business.  The  trust  deed  under  which  bonds  are  issued  may, 
however,  impose  certain  restrictions  on  the  management. 

82 


DEPRECIATION  88 

REASONS  FOR  DEPRECIATION 

For  a  novice,  it  is  not  easy  to  understand  why  a  machine  or 
structure  "kept  in  good  repair"  should  depreciate.  A  new 
machine  is  installed.  Expenditure  for  repairs,  slight  at  first, 
after  a  time  rapidly  increases;  it  may  then  become  more  or  less 
steady  for  a  long  term  of  years,  the  machine  meanwhile  regularly 
operating.  At  some  time  or  times  in  the  history  of  the  machine 
a  costly  change  or  replacement  of  parts  may  be  necessary,  a 
virtual  rebuilding  perhaps,  and  finally,  in  every  case,  like  the 
"one  hoss  shay"  the  machine  becomes  no  longer  a  synthetic 
structure.  No  replacement  of  parts  short  of  an  entire  recon- 
struction— the  building  of  a  new  machine — can  maintain  it  as  a 
productive  entity.  It  has  reached  the  "final  renewal"  stage,  and 
is  itself  scrap,  as  far  as  its  present  owners  are  concerned. 

There  are  three  causes  of  depreciation: 

(a)  The  action  of  time  and  the  elements; 

(b)  Necessary  or  unnnecessary  wear  in  service; 

(c)  The  introduction  of  improved  equipment  which  makes 
present  equipment  obsolete  for  purposes  of  competition. 

This  last  factor  is  the  most  difficult  of  prediction.  A  machine 
may  last  a  long  time — perhaps  a  thousand  years;  but  ultimately 
these  three  causes  will  operate  to  destroy  it. 

SYSTEMS  OF  DEPRECIATION 

Since  no  invoice  is  ever  received  to  remind  us  of  this  expense, 
it  is  particularly  necessary  that  we  adopt  a  system,  as  nearly  as 
possible  automatic  in  its  operation,  whereby  attention  may  be 
called  to  the  matter  and  the  proper  charges  made. 

To  some  moderate  extent,  expenditures  for  repairs  offset  de- 
preciation; and  if,  as  is  universal  practice,  current  repairs  are 
charged  against  cost  of  operation,  a  part  of  the  depreciation 
cost  will  be  taken  care  of  in  this  way.  "Deferred  repairs"  or 
replacements — large  expenditures  for  maintaining  the  condition 
or  operating  efficiency  of  the  plant — are  sometimes  so  costly 
that  the  manager  hesitates  to  charge  them  immediately  against 
operation;  they  may  result  in  a  "bad  showing"  for  the  month 
during  which  they  are  charged.  It  is  therefore  sometimes  the 
practice  to  distribute  the  charge  over  a  series  of  months, 
depending  on  the  anticipated  life  of  the  replacement  or  the 
duration  of  the  economy  due  thereto.  For  example,  suppose 


84  WORKS  MANAGEMENT 

during  6  months  of  the  year  the  profits  have  aggregated 
$50,000.  In  July,  there  is  an  apparent  profit  of  $8000, 
but  during  this  month  an  old  steam  engine  is  replaced  by 
a  new  one,  costing  $12,000.  If  this  $12,000  were  at  once  charged 
against  operation,  the  month  of  July  would  show  a  loss  of  $4000. 
The  manager  may,  consequently,  order  the  distribution  of  the 
$12,000  charge  over  the  balance  of  the  year — $2000  each  month. 
The  July  profits  will  then  appear  as  $6000.  This  is  a  quite  com- 
mon practice,  although  not  one  to  be  regarded  as  conservative. 

In  this  illustration,  we  have  not  regarded  the  new  steam 
engine  as  adding  to  the  value  of  the  plant,  since  it  takes  the 
place  of  another  engine  which  goes  to  the  junk  pile.  It  has  not 
increased  the  potential  output  of  the  works  one  iota,  and  cannot 
therefore  be  regarded  as  an  "improvement,"  which  might  be 
associated  with  an  increase  in  capitalization  and  not  charged 
against  cost  of  operation.  Nor  have  we  regarded  the  case  as 
one  of  the  replacement  of  a  properly  depreciated  machine  for 
the  replacement  of  which  we  have  funds  on  hand,  set  aside 
out  of  the  earnings  of  past  years  in  anticipation  of  this  very 
emergency. 

Final  renewals  eventually  become  necessary  because  of  de- 
preciation. Four  methods  may  be  suggested  for  paying  for 
them:  First,  we  may  wait  until  they  do  become  necessary  and 
then  pay  for  them  either  out  of  the  current  month's  profits  or  by 
distributing  the  cost  over  several  future  months,  borrowing 
from  our  surplus,  as  in  the  case  of  the  steam  engine,  just  cited. 
Either  method  involves  the  borrowing  of  money  or  the  retention 
of  an  adequate  surplus  in  the  treasury.  With  these  disadvantages, 
this  method  of  caring  for  final  renewals  is  not  uncommon.  The 
vital  objection  is  that  eventually  there  comes  a  time  when  re- 
newals become  excessively  frequent  and  costly.  The  industry 
will  then  be  wrecked  unless  its  resources  or  surplus  are  very  large; 
and  if  they  do  happen  to  be  very  large,  it  is  probably  because 
this  condition  of  things  has  been  anticipated,  the  surplus  having 
been  accumulated  as  a  depreciation  reserve;  for  which  very 
reserve,  scientifically  adjusted  and  accumulated,  the  advocates 
of  another  method  presently  to  be  described  contend. 

A  second  common  method  is  this:  No  great  surplus  is  accu- 
mulated, and  no  systematic  effort  is  made  to  forcast  depreciation; 
but  liberal  expenditures  are  constantly  made  for  the  extension, 
enlargement  and  improvement  of  plant,  these  betterments 


DEPRECIATION  85 

being  paid  for,  not  by  increasing  capitalization,  but  out  of  earn- 
ings. If  in  the  example  of  the  million-dollar  plant  referred  to 
the  $600,000  profits  had  been  distributed  after  the  expenditure 
of  $850,000  for  betterments,  possibly  the  value  of  the  plant  after 
its  10  years  of  operation  might  have  been  still  a  million  dollars. 
Its  apparent  profits  would  then  have  been  real  profits. 

This  system  reminds  one  of  a  man  who  refuses  to  give  his  wife 
a  regular  allowance,  but  occasionally  when'  in  good  humor  hands 
her  a  check  or  orders  flowers  and  candy  sent  to  the  house.  There 
is  nothing  scientific  about  it.  It  may  be  safe,  if  the  improvement 
expenditures  are  liberal  and  judicious;  but  to  determine  as  to 
their  liberality  and  judiciousness  involves  the  same  knowledge 
of  the  facts  of  depreciation  that  is  needed  for  a  far  more  logical 
system. 

A  third  method  employed  (whether  avowedly  or  not)  by 
some  large  corporations  is  as  follows:  The  management  and  the 
insiders  generally  wish  to  retain  their  positions.  This  is  easy, 
providing  the  stockholders  in  general  are  kept  satisfied  by  the 
regular  payment  of  dividends  and  accumulation  of  surplus. 
Every  effort  is  therefore  made  to  keep  the  dividend  rate  con- 
stant. Each  year,  a  reserve  for  depreciation  is  set  aside;  and 
the  amount  of  reserve  is  that  amount  which  the  year's  business 
"will  stand/7  If  earnings  have  been  low,  little  or  no  addition 
will  be  made  to  the  reserve. 

If  earnings  have  been  high,  the  reserve  fund  will  be  heavily 
augmented.  The  plan  has  some  attractive  aspects:  it  seems  to 
care  for  the  income  of  the  "widow  and  orphan"  stockholders  as 
a  prime  consideration.  But  in  reality  it  cares  for  their  income 
at  the  hazard  of  their  capital.  It  puts  first  what  should  come 
second;  and  is  unsafe  excepting  for  very  prosperous  corporations 
in  industries  having  no  protracted  periods  of  depression. 

Whai>  may  be  called  the  definitive  method  of  depreciating  is 
not  at  all  common:  less  common,  no  doubt,  in  this  country  than 
in  England,  where  the  accountancy  of  depreciation  is  carefully 
studied  and  practised. 

In  this  method,  the  cost  of  depreciation  is  an  annual  charge 
against  earnings,  fixed  by  estimating  the  probable  life  of  each 
unit  of  material  equipment.  The  sum  of  money  thus  charged 
off  and  laid  aside  as  a  depreciation  reserve  is  that  sum  which, 
invested  at  compound  interest,  will  accumulate  in  such  amounts 
as  will  suffice  to  replace  the  units  of  equipment  as  their  lives  expire. 


86  WORKS  MANAGEMENT 

DEPRECIATION  RATES 

The  basis  of  the  depreciation  rate  is  the  number  of  years  of 
anticipated  life.  The  simplest  plan  is  to  consider  that  the  loss 
in  value  will  be  the  same  each  year  throughout  the  life;  so  that 
a  20  years'  life  to  total  worthlessness  would  involve  (ignoring 
interest)  a  charge  of  5  per  cent,  on  the  initial  cost  of  the  machine 
each  year.  What  is  sometimes  referred  to  as  "5  per  cent, 
depreciation"  may  have  a  different  meaning,  as  follows: 

Initial  value,  $1.00;  depreciation  first  year,  5  per  cent,  of  $1.00 
=  5  cents,  leaving  residual  value  95  cents;  depreciation  second 
year,  5  per  cent,  of  95  cents  =  4  3/4  cents,  leaving  residual  value 
90  1/4  cents;  and  so  on. 

It  is  seldom  the  case  that  the  equipment  is  without  value  at 
the  end  of  its  productive  life.  It  may  be  sold,  as  second  hand 
machinery  or  material,  or  as  scrap.  In  a  few  instances,  however, 
the  residual  value  is  negative.  A  marine  boiler,  for  example, 
at  the  end  of  its  life,  might  be  worth  less  than  the  cost  of  remov- 
ing it  from  the  hull  of  the  vessel;  so  that  the  junk  man  would 
have  to  be  paid  for  taking  it  away.  The  ''initial  cost"  to  be 
considered  as  a  basis  for  depreciation  will  in  such  case  exceed 
the  sum  of  money  actually  paid  for  the  boiler  in  the  first  place. 
In  ordinary  cases,  the  annual  charge  will  be  less  than  the  quo- 
tient of  initial  cost  by  years  of  life.  If  the  life  is  20  years  and 
the  residual  or  scrap  value  10  per  cent,  of  the  initial  cost,  the 
proportion  of  the  initial  cost  to  be  annually  charged  against 
earnings  for  depreciation  will  be  (100—10)  -=-20  =  4  1/2  per  cent, 
(interest  being  ignored) . 

In  the  case  of  an  industry  using  leased  premises,  where  all 
material  equipment  reverts  to  the  owner  at  the  expiration  of  the 
lease,  the  maximum  life  of  any  unit  cannot  exceed  the  prospective 
duration  of  the  lease,  and  there  is  no  residual  value. 

The  estimate  of  probable  life  of  various  kinds  of  machinery 
and  structures  is  a  matter  for  the  expert.  Various  tables  and 
opinion  have  been  published. 

An  English  authority  gives  the  following  figures : 

Electric  generators,  30  years  life  to  8  per  cent,  residual  value. 
Electric  motors,  25  years  life  to  9  per  cent,  residual  value. 
Armored  cables,  35  years  life  to  15  per  cent,  residual  value. 
Storage  batteries,  15  years  life  to  0  per  cent,  residual  value. 
Arc  lamps,  12  years  life  to  0  per  cent,  residual  value. 
Lamp  posts,  40  years  life  to  0  per  cent,  residual  value. 


DEPRECIATION  87 

Electrical  instruments,  12  years  life  to  0  per  cent,  residual 
value. 

Water  tube  boilers,  25  years  life  to  5  per  cent,  residual  value. 

Steam  engines,  25  years  life  to  6  per  cent,  residual  value. 
The  reports  of  13  large  street  railway  companies  in  1909  showed 
the  whole  depreciation  charge  to  have  varied  from  0.7  to  13.7 
per  cent,  of  gross  earnings. 

The  possibility  of  early  obsolescence  through  the  introduction 
of  improved  machinery  must  be  carefully  considered  in  fixing 
probable  life.  New  and  unfamiliar  machinery  is  usually  heavily 
depreciated  because  it  is  felt  that  important  improvements  are 
likely  to  be  made  at  an  early  date.  Probably  the  safest  estimates 
on  life  duration  are  those  made  on  live  stock  —  horses,  for 
example.  Small  portable  tools  are  depreciated  heavily.  De- 
preciation rates  in  general  are  higher  than  they  formerly  were. 

The  estimates  of  probable  life  may  be  (probably  should  be) 
revised  every  year.  Thus,  if  on  the  basis  of  20  years  life  of  a 
machine  initially  costing  $100  we  are  charging  off  $5  each  year 
(scrap  value  and  interest  are  here  ignored),  and  if  after  10  years 
we  find  that  the  machine  is  likely  to  wear  out  or  become  obsolete 
in  2  years  more,  we  charge  off  $25  instead  of  $5  during  each  of 
those  remaining  two  years.  On  the  other  hand,  if  the  life 
promises  to  exceed  the  original  estimate,  we  will  decrease  the 
charge.  It  is  quite  possible  that  after  the  expiration  of  the 
predicted  life  term  a  machine  may  go  on  operating  for  some 
years,  with  no  depreciation  charge  against  it.  The  machine  is 
carried  on  the  books  as  scrap;  interest  earned  by  its  proportion 
of  the  depreciation  reserve  fund  will  be  "velvet." 

THE  DEPRECIATION  FUND 

Having  determined  the  probable  loss  of  value  in  the  term  of  years 
representing  the  anticipated  life  of  the  machine,  we  must  now  ascer- 
tain what  sum  of  money  must  be  set  aside  annually  in  order  that  it 
may  eventually  equal  the  sum  representing  the  loss  of  value. 

This  depends  upon  the  rate  of  interest  and  the  frequency  of 
compounding.  Tables  are  available  for  the  purpose,  but  the 
following  formula  makes  a  table  unnecessary. 


.r  -  1 

where  A  is  the  annual  appropriation,  in  dollars,  n  is  the  number 
of  years  of  life  (compounding  assumed  to  be  annual)  ,  r  is  1  plus 
the  fraction  indicated  by  the  probable  rate  of  interest;  i.e.,  if 


88  WORKS  MANAGEMENT 

the  interest  rate  is  4  per  cent.,  r  =  1.04;  and  S  is  the  loss  in  value 
in  dollars  to  be  offset  by  the  annual  appropriation  A.  Thus, 
a  machine  costing  $100,  with  a  residual  value  of  $10,  would  give 
S  =  $90.  If  the  life  is  10  years,  and  interest  costs  4  per  cent., 
r  =  1.04  and 


rn-l 
0.04  0.04 


04  04802  ' 

whereas   if   the  reserve  fund  had  not  been  compounded,  the 
annual  charge  would  have  been  $9.00. 

The  determination  of  the  rate  of  interest  to  be  assumed  in  this 
computation  is  a  problem  for  the  banker.  No  small  degree  of 
judgment  is  involved  in  fixing  upon  a  rate  which  shall  be  fair 
and  yet  conservative  over  a  period  of  years  to  come.  It  is  of 
course  possible  to  revise  the  rate  from  time  to  time,  just  as 
estimated  life  rates  may  be  revised.  In  the  example  with  which 
we  are  dealing,  suppose  it  to  be  concluded,  after  5  years,  that  a 
rate  of  5  per  cent,  instead  of  four  may  hereafter  be  safely 
assumed.  The  present  accumulated  reserve  for  depreciation  is 
first  ascertained.  This  is  to  go  on  accumulating  interest  for 
5  years  more  at  5  per  cent.;  let  the  amount  which  will  be  thus 
realized  be  called  x.  Then  the  amount  to  be  realized  by  further 
annual  appropriations  is  90  -  x,  and 


from  which  A,  the  revised  annual  appropriation  necessary, 
may  be  computed.  It  will  of  course  be  somewhat  less  than 
$7.49  1/2. 

BETTERMENTS 

While  this  is  a  satisfactory  system  from  an  accounting  stand- 
point, though  somewhat  complicated  in  application,  it  is  not 
yet  complete  from  the  manager's  point  of  view.  A  vital  question 
with  him  is  the  distribution  of  the  depreciation  reserve.  It  is 
intended  to  be  used,  when  the  machines  wear  out,  for  their  re- 

1  To  evaluate  an  expression  like  1  .  0410,  we  must  employ  a  table  of  logarithms.  To 
multiply  two  numbers,  we  add  their  logarithms;  the  sum  is  the  logarithm  of  the  product. 
To  raise  a  number  to  any  power,  we  multiply  the  logarithm  of  the  number  by  the  exponent; 
the  product  is  the  logarithm  of  the  required  quantity.  Thus:  - 

log  1.04  =  0.017033 

(log  1.  04)  X  10  =  0.17033  =  log  (1.4802  —  1.04"). 


DEPRECIATION 


placement;  and  unless  so  used  it  is  idle  money:  the  plant  will 
gradually  become  less  productive  on  account  of  the  presence  of 
worn-out  equipment. 

ANNUITY  TABLE1 

Giving  yearly  payments  in  dollars  required  to  redeem  $100  at  end  of  any 
year  from  1  to  100.     Interest  compounded  annually. 


Life, 
years 

Rate  of  interest 

Life, 
years 

24% 

3% 

34% 

4% 

44% 

5% 

6% 

1 

100.00     !   100.00 

100.00        100.00 

100.00      100.00 

100.00 

1 

2 

49.38     ;     49.26 

49.14          49.02 

48.90        48.78 

48.54 

2 

3 

32.51           32.36 

32.19          32.03 

31.88        31.72 

31.41 

3 

4 

24.08     !     23.90 

23.73 

23.55 

23.37 

23.20 

22.86 

4 

5 

19.02          18.84 

18.65          18.46 

18.28        18.10 

17.74 

5 

6 

15.65 

15.46 

15.27          15.08 

14.89 

14.70 

14.34 

6 

7 

13.25 

13.05 

12.85          12.66 

12.47 

12.28 

11.91 

7 

8 

11.45 

11.25 

11.05          10.85 

10.66 

10.47 

10.10 

8 

9 

10.05 

9.84            9.64 

9.45 

9.26 

9.07 

8.70 

9 

10 

8.93 

8.72            8.52     ;       8.33 

8.14          7.95 

7.59 

10 

.  11 

8.01 

7.81            7.61            7.42 

7.23          7.04 

6.68 

11 

12 

7.25            7.05            6.85 

6.66 

6.47 

6.28 

5.93 

12 

13 

6.60            6.40            6.21 

6.01 

5.83 

5.65 

5.30 

13 

14 

6.05            5.85            5.66 

5.47 

5.28 

5.10 

4.76 

14 

15 

5.58            5.38 

5.18 

4.99 

4.81 

4.63 

4.30 

15 

16 

5.16            4.96            4.77            4.58 

4.40 

4.23 

3.90 

16 

17 

4.79     !       4.60     i       4.40     j       4.22 

4.  Q4 

3.87 

3.54 

17 

18 

4.47     '       4.27            4.08 

3.90 

3.72 

3.55 

3.24 

18 

19 

4.18            3.98            3.79 

3.61 

3.44 

3.27 

2.96 

19 

20 

3.91            3.72     1       3.54 

3.36 

3.19 

3.02 

2.72 

20 

21 

3.68            3.49            3.30 

3.13 

2.96 

2.80 

2.50 

21 

22 

3.46            3.27            3.09 

2.92 

2.75 

2.60 

2.30 

22 

23 

3.27            3.08            2.90 

2.73 

2.57 

2.41 

2.13 

23 

24 

3.09 

2.90            2.73 

2.56 

2.40 

2.25 

1.97 

24 

25 

2.93            2.74            2.57 

2.40 

2.24 

2.10 

1.82 

25 

26 

2.78 

2.59 

2.42 

2.26 

2.10 

1.96 

1.69 

26 

27 

2.64 

2.46            2.29 

2.12 

.97 

1.83 

1.57 

27 

28 

2.51 

2.33            2.16 

2.00 

.85 

1.71 

1.46 

28 

29 

2.39 

2.21 

2.04 

1.89 

.74 

1.60 

1.36 

29 

30 

2.28            2.10            1.94 

1.78 

.64 

1.51 

1.26 

30 

31 

2.17            2.00 

1.84 

1.69 

.54 

1.41 

1.18 

31 

32 

2.08            1.90 

1.74 

1.60 

.46 

1.33 

1.10 

32 

33 

1.99            1.82 

1.66 

1.51          1.37 

1.25 

1.03 

33 

34 

1.90 

1.73 

1.58 

1.43 

1.30 

1.18 

0.96 

34 

35 

1.82 

1.65 

1.50 

1.36 

1.23 

1.11 

.90 

35 

1  Reproduced  by  permission  from  Lecture  Notes  on  Business  Features  of  En- 
gineering Practice  (Second  Edition,  Revised)  by  President  A.  C.  Humphreys. 


90 


WORKS  MANAGEMENT 
ANNUITY  TABLE.— Continued. 


Life, 

Rat 

B  of  interes 

t 

Life, 

years 

2*% 

3% 

3i% 

4% 

4*% 

5% 

6% 

years 

36 

1.75 

1.58 

.43 

1.29 

1.16 

1.04 

.84 

36 

37 

1.67 

1.51 

.36 

1.22 

1.10 

0.98 

.79 

37 

38 

1.61 

1.45 

.30 

1.16 

1.04 

.93 

.74 

38 

39 

1.54 

1.38 

.24 

1.11 

0.99 

.88 

.69 

39 

40 

1.48 

1.33 

.18 

1.05 

.93 

.83 

.65 

40 

41 

.43 

1.27 

.13 

1.00 

.89 

.78 

.61 

41 

42 

.37 

1.22 

.08 

0.95 

.84 

.74 

.57 

42 

43 

.32 

1.17 

.03 

.91 

.80 

.70 

.53 

43 

44 

.27 

1.12 

0.99 

.87 

.76 

.66 

.50 

44 

45 

.23 

1.08 

.95 

.83 

.72 

.63 

.47 

45 

46 

.18 

1.04 

.91 

.79 

.68 

.59 

.44 

46 

47 

.14 

1.00 

.87 

.75 

.65 

.56 

.41 

47 

48 

.10 

0.96 

.83 

.72 

.62 

.53 

.39 

48 

49 

.06 

.92 

.80 

.69 

.59 

.50 

.37 

49 

50 

.03 

.89 

.76 

.66 

.56 

.48 

.34 

50 

51 

.99 

.85 

.73 

.63 

.53 

.45 

.32 

51 

52 

.96 

.82 

..70 

.60 

.51 

.43 

.30 

52 

53 

.93 

.79 

.67 

.57 

.48 

.41 

.29 

53 

54. 

.89 

.76 

.65 

.55 

.46 

.39 

.27 

54 

55 

.87 

.73 

.62 

.52 

.44 

.37 

.25 

55 

56 

.84 

.71 

.60 

.50 

.42 

.35 

.24 

56 

57 

.81 

.68 

.57 

.48 

.40 

.33 

.22 

57 

58 

.78 

.66 

.55 

.46 

.38 

.31 

.21 

58 

59 

.76 

.64 

.53 

.44 

.36 

.30 

.20 

59 

60 

.74 

.61 

.51 

.42 

.35 

.28 

.19 

60 

61 

.71 

.59 

.49 

.40 

.33 

.27 

.18 

61 

62 

.69 

.57 

.47 

.39 

.31 

.26 

.17 

62 

63 

.67 

.55 

.45 

.37 

.30 

.24 

.16 

63 

64 

.65 

.53 

.44 

.35 

.29 

.23 

.15 

64 

65 

.63 

.51 

.42 

.34 

.27 

.22 

.14 

65 

66 

.61 

.50 

.40 

.32 

.26 

.21 

.13 

66 

67 

.59 

.48 

.39 

.31 

.25 

.20 

.12 

67 

68 

.57 

.46 

.37 

.30 

.24 

.19 

.12 

68 

69 

.56 

.45 

.36 

.29 

.23 

.18 

.11 

69 

70 

.54 

.43 

.35 

.27 

.22 

.17 

.10 

70 

71 

.52 

.42 

.33 

.26 

.21 

.16 

.10 

71 

72 

.51 

.41 

.32 

.25 

.20 

.15 

.09 

72 

73 

.49 

.39 

.31 

.24 

.19 

.15 

.09 

73 

74 

.48 

.38 

.30 

.23 

.18 

.14 

.08 

74 

75 

.47 

.37 

.29 

.22 

.17 

.13 

.08 

75 

76 

.45 

.35 

.28 

.21 

.16 

.13 

.07 

76 

77 

.44 

.34 

.27 

.21 

.16 

.12 

.07 

77 

78 

.43 

.33 

.26 

.20 

.15 

.11 

.06 

78 

79 

.41 

.32 

.25 

.19 

.14 

.11 

.06 

79 

80 

.40 

.31 

.24 

.18 

.14 

.10 

.06 

80 

DEPRECIATION 
ANNUITY  TABLE.— Continued. 


91 


Life, 
years 

Rate  of  interest 

Life, 
years 

%% 

3% 

3*% 

4% 

41%            5% 

6% 

81 

.39 

.30 

.23 

.17 

.13 

.10 

.05 

81 

82 

.38 

.29 

.22 

.17 

.13 

.09 

.05 

82 

83 

.37 

.28 

.21 

.16 

.12 

.09 

.05 

83 

84 

.36 

.27 

.21 

.15 

.11 

.08 

.05 

84 

85 

.35 

.26 

.20 

.15 

.11 

.08 

.04 

85 

86 

.34 

.26 

.19 

.14 

.10 

.08 

.04 

86 

87 

.33 

.25 

.18 

.14 

.10 

.07 

.04 

87 

88 

.32 

.24 

.18 

.13 

.10 

.07 

.04 

88 

89 

.31 

.23 

.17 

.13 

.09 

.07 

.03 

89 

90              .30               .23 

.17 

.12 

.09 

.06 

.03 

90 

91               .30              .22 

.16 

.12 

.08 

.06 

.03 

91 

92 

.29               .21 

.15 

.11 

.08 

.06 

.03 

92 

93 

.28     i          .21 

.15 

.11 

.08 

.05 

.03 

93 

94 

.27               .20 

.14 

.10 

.07 

.05 

.03 

94 

95 

.26               .19 

.14 

.10 

.07 

.05 

.02 

95 

96 

.26 

.19 

.13 

.09 

.07 

.05 

.02 

96 

97 

.25 

.18 

.13 

.09 

.06 

.04 

.02 

97 

•98 

.24               .18 

.12 

.09 

.06 

.04 

.02 

98 

99 

.24               .17 

.12 

.08 

.06 

.04 

.02 

99 

100 

.23 

.16 

.12 

.08 

.06 

.04 

.02 

100 

EXPLANATION  OF  TABLES 

The  Annuity  table  shows  what  sum  of  money  must  be  invested  each 
year  in  order  that  the  accumulations,  at  a  stated  rate  of  interest,  com- 
pounding being  annual,  may  amount  to  $100  at  the  expiration  of  any 
number  of  years  from  1  to  100.  Thus,  for  this  case  considered  on  page  96, 
we  wish  to  know  the  annual  investment  at  4  per  cent,  necessary  to  realize 
$90  at  the  end  of  10  years.  The  table  shows  that  at  4  per  cent.,  $8.33 
would  redeem  $100  in  ten  years;  consequently,  to  realize  $90  we  should 
have  to  set  aside,  as  computed  in  the  text,  $7.49|  =  $8.33  X  T\V 

The  compound  interest  table  may  be  used  to  determine  the  amount  of 
accumulations  of  such  depreciation  fund  at  any  given  time.  Thus,  in  the 
instance  discussed,  $1  invested  at  4  per  cent,  would  in  5  years  become 
$1.2167.  Proceeding,  we  write 

$1  invested  5  years  at  4  per  cent.  =  $1.2167 
$1  invested  4  years  at  4  per  cent.  =  1.1699 
$1  invested  3  years  at  4  per  cent.  =  1.1249 
$1  invested  2  years  at  4  per  cent.  =  1.0816 
$1  invested  1  year  at  4  per  cent.=  1.0400 
Total  accumulations  from  $1  annually,  in  5  years  =  $5.6331 

The  accumulations  from  an  investment  of  $7.49|  annually  will  then  be 
$7.49£  X  5.6331=  $42.20.  Consider  now  the  problem  suggested  at  the 


92  WORKS  MANAGEMENT 


EXPLANATION  OF  TABLES — Continued 

bottom  of  page  96.  The  table  shows  that  $1  in  5  years  at  5  per  cent, 
will  realize  $1.2763.  Our  accumulation  of  $42.20  will  then  realize 
$42.20  X  1.2763=  $53.87.  (This  is  the  amount  called  x  in  the  formula.) 
We  have  now  to  realize  $90.00 -$53.87=  $36.13,  in  the  next  five  years,  at 
5  per  cent.  The  annuity  table  shows  that  to  realize  $100  we  should  have 
to  set  aside  $18.10  annually.  We  shall  actually  have  to  set  aside 
$18.10  X  0.3613=  $6.54,  which  should  be  equal  to  the  value  of  A  obtained 
in  solving  the  formula  at  the  bottom  of  page  88. 


DEPRECIATION 


93 


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94 


MANAGEMENT 


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DEPRECIATION 

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96 


WORKS  MANAGEMENT 


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DEPRECIATION  97 

In  general,  when  a  machine  is  replaced,  the  effort  will  be 
made  not  only  to  fill  its  place,  but  to  put  in  something  better — 
more  substantial  or  economical.  This  " something  better"  may 
cost  more  than  the  loss  of  value  of  the  machine;  so  that  the 
depreciation  reserve  fund  may  be  insufficient  to  pay  for  the 
new  machine.  No  matter,  it  was  not  the  object  of  this  fund 
to  pay  for  betterments,  but  merely  to  insure  the  maintenance 
of  the  plant  at  its  original  value.  If  betterments  are  contem- 
plated, they  may  profitably  be  paid  for  by  increasing  capitali- 
zation, for  they  increase  the  worth  of  the  plant.  But  only 
the  increased  expenditure  should  be  regarded  as  a  basis  for  new 
capitalization.  If  the  depreciation  accumulations  are  $90  and 
the  scrap  value  $10,  while  the  replacement  machine  costs  $200, 
just  half  of  this  latter  sum  will  be  paid  for  out  of  the  depreciation 
reserve  and  the  scrap  sale  proceeds;  only  the  balance  of  $100 
will  be  covered  by  increase  of  capitalization. 

In  many  cases  of  minor  betterment,  no  formal  "increase  of 
capitalization"  is  made.  The  procedure  is  merely  (for  example) 
to  take  the  needed  $100  from  the  cash  surplus  on  hand,  account- 
ing for  it  hereafter  by  adding  $100  to  the  estimated  physical 
value  of  the  plant,  which  has  been  enlarged  to  this  extent.  The 
betterment  expenditure  of  $100  has  thus  been  charged  to  capital 
instead  of  to  earnings. 

Obviously,  there  is  a  broad  opportunity  here  for  evidence  of  a 
disposition  varying  anywhere  from  the  safely  conservative  to 
that  of  a  gambler.  In  general,  no  charges  will  be  made  to 
capital  unless  the  "betterment"  is  one  which  actually  increases 
output  or  decreases  cost.  Even  this  last  condition  is  not 
deemed  sufficient  by  the  most  conservative  managers. 

A  corporation  may  occasionally  seek  to  conceal  its  profits  by 
excessive  provision  for  depreciation,  the  funds  thus  created 
being  put  back  into  the  plant  in  the  form  of  replacements  and 
extensive  betterments.  Where  there  is  no  "graft"  in  contracts 
or  orders  for  betterments,  this  practice  is  of  course  financially 
sound,  although  stockholders  might  prefer  a  fuller  distribution 
of  earnings.  But  from  the  standpoint  of  the  consuming  public 
it  is  beginning  to  be  felt  that  earnings  should  not  be  hidden  in 
this  way:  that  after  a  fair  provision  for  depreciation  has  been 
made,  and  a  reasonable  profit  paid  to  the  owners  of  the  business, 
any  further  surplus  should  be  wiped  out  by  a  reduction  in  price 
to  the  consumer. 

7 


98 


WORKS  MANAGEMENT 


The  following  table  (from  Industrial  Progress)  gives  a  few  examples  of  betterments  paid 
for  out  of  earnings: 

RETURN  INTO  PROPERTY  FROM  INCOME 


Company 

Kind  of  service 

Year  ending 

j 
Per  cent,  of 
gross  earnings 
put  back  into 
property    as 
betterments 

United  States  Census,  1907. 

939  electric  railway  com- 

Dec. 31,  1907.. 

17.1 

panies     including      small 

amount  of  electric  light. 

United  States  Census,  1902. 

799  companies,  all  electric 

Dec.  31,  1902.. 

17.4 

railways,   including   some 

electric  light. 

State  of  N.  Y.—  D  i  s  t  r  i  c  t 

Electric  railways  

June  30,  1907. 

11.7 

No.  1. 

State    of    N.    Y.—  District 

Electric  railways  

June  30,  1907.. 

19.9 

No.  2. 

State  of  Massachusetts  

Electric  railways  . 

Sept.  30,  1908. 

15.3 

United  Rys.  and  Elec.  Co., 

Urban  and  suburban  rail- 

Dec. 31,  1908.. 

21.7 

Baltimore. 

way. 

Brooklyn  Rapid  Transit  Co. 

Surface  and  elevated  rail- 

June 30,  1909.  . 

19.3 

way. 

International     Tract.     Co., 

Urban,  suburban  and  inter- 

Dec.  31,  1908.. 

19.3 

Buffalo. 

urban  railway. 

Twin  City  Rapid  Transit  Co. 

Urban  and  suburban  rail- 

Dec. 31,  1908.. 

18.1 

way. 

Kansas  City  Ry.  and  Lt.  Co. 

Railway  and  electric  light.  . 

May  31,  1908... 

17.8 

Boston  Elevated  Railway... 

Surface,  elevated,   subway 

Sept.  30,  1909. 

18.6 

railway. 

American  Cities  Ry.  and  Lt. 

5  electric  railway  and  light 

Dec.  31,  1908.. 

14.9 

Co. 

companies,    Birmingham, 

Memphis,     Little     Rock, 

Knoxville  and  Houston. 

Capital  Tract,   Co.,   Wash- 

Urban and  suburban  rail- 

Dec. 31,  1908.. 

14.1 

ington. 

way. 

Philadelphia  Rapid  Transit 

Surface,  elevated,  subway 

June  30,  1909.. 

9.7 

Co. 

railway. 

Great  Britain  and  Ireland.  . 

Municipal     and     company 

Dec.  31,  1907.. 

28.7 

railways. 

Great  Britian  and  Ireland.  . 

Municipal  raihvays  

Mar.  31,  1908.. 

31.2 

Great  Britain  and  Ireland.  . 

Company  railways  

Dec.  31,  1907.. 

22.2 

Glasgow  Corporation  Tram- 

Municipal railways  

May  31,  1909... 

42.6 

ways. 

DEPRECIATION  ACCOUNTING 

The  simple  statement  of  entries  to  be  made  on  books  of  record 
here  given  will  perhaps  be  more  intelligible  to  some  readers  after 
examination  of  the  chapter  on  principles  of  accounting.  In 
order  to  complete  the  present  discussion,  however,  we  cite  the 
following  rules: 


DEPRECIATION  99 

At  the  end  of  each  year,  set  aside  the  necessary  reserve  fund 
as  computed  by  debiting  Loss  and  Gain  and  crediting  Depre- 
ciation Reserve.  This  sum  of  money  then  disappears  as  a  gain 
and  appears  as  a  liability.  When  a  machine  is  replaced,  pay 
for  the  replacement,  crediting  Cash  and  debiting  Depreciation 
Reserve.1 

This  latter  account  is  sometimes  alternatively  entitled  Final 
Renewal  Fund.  Depreciation  is  thus  treated  as  an  accruing 
liability,  like  royalties,  insurance,  taxes,  etc.  An  artificial  ac- 
count is  created  to  which  we  assumedly  owe  certain  money  held 
in  the  cash  drawer  or  banks.  When  the  money  is  spent,  we 
wipe  out  our  debt  to  this  artificial  account.  Whenever  interest  is 
declared  on  money  credited  to  Final  Renewal  Fund,  we  credit 
such  interest  also  to  that  fund,  debiting  cash. 

1The   distribution   of  depreciation   charges  against  specific   production   orders   may  be 
effected  in   the  manner  described  in   the  preceding   chapter. 


CHAPTER  VIII 
INDUSTRIAL  ORGANIZATION 

The  function  of  management,  somewhat  narrowly  and  briefly 
stated,  is  to  control  and  reduce  costs.  This  is  the. ideal  in  view 
in  any  discussion  of  types,  forms  arid  functions  of  industrial 
organization.  The  whole  of  this  book  is  devoted  to  a  presentation 
of  the  conditions  of  productive  efficiency.  There  are,  however, 
three  important  duties  in  management  which  may  well  be  em- 
phasized here.  They  are: 

1.  To  produce  a  development  of  the  plant  that  will  augment 
its  importance  in  the  field  it  serves. 

2.  To  conserve  the  physical  value  of  the  works  in  all  of  its 
parts. 

3.  To  protect  the  industry,  as  far  as  may  be,  from  sudden  and 
heavy  losses. 

THE  PLANT  MUST  GROW 

An  industry  is  a  living  thing,  and  no  living  thing  is  in  truly 
healthful  condition  excepting  as  it  grows,  changes.  The  manu- 
facturing plant  is  seldom,  and  should  be  never,  in  settled  con- 
dition for  perfectly  standardized  operation.  If  it  is  not  en- 
larging, either  as  a  whole  or  in  certain  departments,  it  will  be 
increasing  its  output  by  minor  improvements  in  equipment;  or  at 
least  will  by  such  methods  be  reducing  its  cost  of  operation. 

The  study  of  industrial  investment  is  then  one  which  the  man- 
ager must  not  outgrow.  His  first  care  will  be  that  no  expen- 
ditures are  charged  to  plant  improvement  which  ought  to  be 
charged  as  repairs  against  earnings,  lest  his  costs  look  well  now 
at  the  certainty  of  a  serious  burden  in  the  future.  His  expen- 
ditures for  proposed  betterments  will  be  rigorously  scrutinized 
and  recorded  and  the  results  weighed.  In  advance  of  every 
such  expenditure,  inquiry  will  be  made  as  to  its  amount,  the 
exact  benefit  to  be  expected  and  the  time  when  that  benefit  will 
be  realized,  and  the  probable  indirect  effects  of  such  expenditure 

100 


INDUSTRIAL  ORGANIZATION  101 

on  every  part  of  the  business.  After  the  improvement  has  been 
made  the  final  results  will  be  compared  with  those  anticipated. 

Managers — particularly  managers  who  are  engineers — are 
fond  of  spending  money  on  equipment  which  they  think  will, 
after  due  allowance  for  interest  and  depreciation,  reduce  costs 
of  operation.  It  is  a  difficult  thing  to  say  what  amount  of  net 
saving  must  be  realized  to  make  the  proposed  expenditure  attrac- 
tive. In  pure  theory,  any  net  saving  whatever  after  all  deduc- 
tions have  been  paid  would  seem  to  warrant  a  betterment;  but 
estimates  are  so  uncertain,  conditions  so  variable,  proposed 
costs  of  equipment  are  so  often  exceeded  and  anticipated  savings 
therefrom  so  frequently  not  realized,  that  some  rather  large  esti- 
mated percentage  of  net  saving  is  usually  considered  essential. 
Many  works  managers  regard  15  to  20  per  cent,  as  not  unreason- 
ably high.  Some  ask  25  to  35  per  cent.  Improvements  (and 
industrial  investments  generally)  must  pay  better  in  the  United 
States  than  in  most  manufacturing  countries,  because  interest 
rates  are  higher  here. 

There  are  two  classes  of  betterment:  those  intended  to  increase 
output,  either  by  the  direct  addition  of  machinery  or  by  its 
better  arrangement  and  alignment;  and  those  which  have  in 
view  a  reduction  in  cost  of  operation.  The  latter  result  is 
usually  secured  as  a  by-product  of  improvements  of  the  first  class; 
and  such  improvements  are,  consequently,  those  to  which  the 
most  attention  should  be  devoted. 

When  it  is  finally  agreed  that  this  or  that  betterment  will  pro- 
duce some  stated  saving,  it  is  obvious  that  every  day's  failure  to 
realize  such  saving  means  a  loss  of  potential  profit.  Therefore, 
improvements  are  often  installed  with  such  haste  that  they  may 
later  have  to  be  virtually  duplicated;  or  at  least  so  that  they  may 
require  extensive  changes  and  repairs  to  fit  them  for  satis- 
factory operation.  We  must  not  be  in  too  much  of  a  hurry  to 
realize  prospective  savings.  On  the  other  hand,  it  may  be  un- 
profitable to  resort  to  excessive  solidity  of  construction  which 
shall  either  seriously  delay  the  realization  of  the  anticipated 
economy,  or  impair  the  future  flexibility  of  the  plant.  The  ideal  of 
a  "mill  without  a  repair  account"  is  not  necessarily  good.  English 
railways  were  originally  constructed  much  more  substantially, 
and  at  a  much  greater  cost  per  mile,  than  American  railways. 
Operating  expenses  on  the  former  consumed  60  per  cent,  of  the 
gross  receipts;  on  the  latter,  90  per  cent.  But  whereas  the  better 


102  WORKS  MANAGEMENT 

American  roads  have  in  the  last  decade  been  virtually  recon- 
structed with  increased  clearances  and  weight  limits,  the  cost 
of  doing  this  on  the  English  roads,  on  account  of  their  heavy 
masonry  structures,  would  be  prohibitive.  The  latter  roads 
cannot  therefore  be  made  suitable  for  the  heavier  equipment 
which  modern  conditions  invite. 

A  large  mill  was  kept  down  in  output  to  half  capacity  because 
of  a  four  hour  overload  condition  in  its  power  plant.  The 
suggestion  was  made  that  a  250  horse-power  steam  engine  be 
installed  to  overcome  this  condition;  and  inquiry  was  made  for 
an  engine  of  a  highly  economical  type,  on  which  4  months  was 
asked  for  delivery.  The  engine  finally  purchased  was  some- 
what less  economical,  but  it  was  obtained  from  stock  and  was 
running  within  16  days  from  the  day  of  decision.  The  saving  in 
value  of  mill  time  was  estimated  to  be  such  that  it  would  offset 
the  difference  in  fuel  consumption  of  the  two  engines  for  23 
years,  a  period  longer  than  the  conservatively  estimated  life  of 
either  machine. 

When  a  "  run  down  "  concern  is  taken  in  hand  for  rehabilitation, 
those  improvements  first  made  should  be,  generally,  the  ones 
which  will  effect  the  greatest  savings.  Encouragement  is  thus 
given  those  who  are  supplying  the  money.  Naturally,  however, 
considerations  of  cost  reduction  may  have  to  give  way  to  those 
of  safety  or  surety  of  operation.  It  is  necessary  to  "  keep  things 
running"  whether  we  reduce  costs  or  not. 

An  improvement  looking  toward  cost  economy,  to  be  attrac- 
tive, must  produce  a  return  at  least  equal  to  the  profits  made  on 
the  business  as  a  whole.  If  it  will  not  do  this,  the  money  might 
better  be  spent  in  simply  enlarging  the  business.  The  exception 
should  be  made,  however,  that  in  a  business  subject  to  great 
fluctuations,  cost  reducing  improvements  might  be  preferable  to 
extensions  because  they  place  the  industry  in  a  more  strategic 
competitive  position.  No  one  wishes  to  derive  his  whole  in- 
come from  low-yielding  government  bonds;  but  a  few  such  bonds 
mixed  with  a  variety  of  securities  makes  the  whole  mass  regarded 
as  better  collateral. 

Two  points  should  be  especially  watched  in  connection  with 
improvement  expenditures:  preliminary  estimates  should  cover 
the  entire  cost  of  the  improvement  and  related  undertakings;  and 
costs  should  be  totaled  frequently  during  construction  so  that 
early  warning  may  be  had  in  case  they  are  exceeding  estimates. 


INDUSTRIAL  ORGANIZATION  103 

THE  MANAGER  AS  A  WATCHDOG 

The  manager  virtually  holds  the  property  in  trust  for  its 
owners.  He  must  be  ready  to  turn  it  over  to  them,  at  any  mo- 
ment and  without  notice,  in  as  good  condition  as  when  he  received 
it.  The  importance  of  providing  for  depreciation  out  of  earnings 
has  been  mentioned;  and  this  is  one  of  the  principal  guarantees 
that  a  conservative  manager  gives. 

Besides  machinery,  structures  and  equipment,  the  physical 
property  entrusted  includes  the  stocks  of  raw  and  finished 
materials  and  of  by-products  and  scrap.  These  must  be  inven- 
toried, not  at  their  cost  (which  would  seem  to  be  the  obvious 
way)  but  at  their  estimated  market  value,  or  (to  be  conservative) 
at  some  percentage  less  than  that  market  value.  If  raw  material 
were  carried  on  the  books  at  cost,  and  the  price  of  such  material 
gradually  fell,  there  might  be  an  ultimate  large  difference  between 
book  value  and  actual  value.  When  the  plant  runs  (in  a  dull 
season)  at  a  low  output,  the  unit  costs  of  products  are  high — 
admissibly  so,  because  it  is  usually  better  to  run  at  a  loss  than 
not  to  run.  But  these  products  cannot  be  sold  at  such  high 
cost;  they  must  be  sold,  when  sold,  at  the  market  price,  and 
they  should  be  carried  on  the  books,  therefore,  at  market  price 
rather  than  cost  price.  This  is  the  only  safe  way. 

Not  merely  the  good  condition  of  equipment  as  for  exhibition 
purposes,  but  its  conservative  and  effective  use  are  parts  of  the 
watch  dog  function.  The  manager  must  determine  (as  far  as 
it  is  in  the  province  of  any  individual  to  determine)  whether 
the  plant  shall  run  10  hours  or  24  hours  daily — if  the  former, 
whether  the  tours  shall  be  8-hour  or  12-hour;  whether  it  shall 
run  the  year  round  or  shall,  because  of  bad  business  conditions, 
lack  of  storage  capacities  or  other  reasons,  have  its  seasonal 
shut-downs  and  consequent  periods  of  disorganization.  Twenty- 
four  hour  service  reduces  fixed  cost  (interest,  taxes,  insurance , 
general  administration,  etc.)  per  unit  of  product;  but  it  is  not 
economical  in  labor  or  material  because  night  work  is  for  human 
beings  necessarily  less  efficient  than  day  work.  The  24-hour 
mill  will  be  the  one  in  which  fixed  charges  are  important  items 
in  the  total  cost,  in  which  continuous  service  is  necessary  to 
the  consumer  or  in  which  wastes  of  material  occur  when  opera- 
tion ceases.  The  8-hour  day  as  compared  with  the  12-hour  day 
is  apt  to  lead  to  a  higher  cost  of  labor  to  the  employer  and  a 


104  WORKS  MANAGEMENT 

lower  day's  wages  to  the  workman.  If  coupled  with  the  intro- 
duction of  a  modern  system  of  labor  payment,  the  change  from 
a  12-hour  to  an  8-hour  day  may  easily  be  made  without  injury 
to  either.  Twelve  hours  is  too  long  a  regular  day's  work  for 
any  man. 

Some  industries  are  fortunate  in  producing  staple  commodities 
of  such  small  bulk  that  several  months'  output  may  be  stored  in 
times  of  business  depression.  Such  storage  represents  cost  in  in- 
terest charges;  but  the  cost  may  be  small  in  comparison  with  either 
of  the  two  which  the  industry  must  face  which — because  its  product 
is  variable  or  because  it  cannot  be  stored — has  to  close  its  doors 
in  dull  times.  Tremendous  expenses  go  on,  necessarily,  whether 
the  doors  are  open  or  closed.  Other  expenses,  like  those  for 
material,  are  practically  eliminated;  but  the  cost  of  the  organi- 
zation of  employees  and  their  directors  must  either  be  nearly 
eliminated  at  great  hardship  to  the  men  and  hampering  to  the 
future  of  the  mill,  or  else  carried  on  with  no  production  against 
which  to  apply  it.  This  is  a  dilemma  indeed.  The  decision 
must  be  made  with  reference  to  many  factors:  the  probable 
duration  of  the  shut  down;  the  inducements  offered  the  men 
elsewhere;  the  degree  of  skill  and  training  required  of  the  men; 
the  possibility  of  utilizing  them  on  such  works  of  repair  and 
construction  as  the  manager  may  have  courage  to  undertake,  etc. 

No  expense  is  so  easily  reduced  by  the  management  as  that  for 
repairs  and  maintenance.  In  "hard  times,"  or  when  attacked 
by  the  public,  it  is  easy  for  the  railways,  for  example,  to  produce 
immediate  large  savings  in  "maintenance  of  way"  and  "main- 
tenance of  equipment"  expenditures.  But  these  are  frequently 
in  truth  not  savings  at  all.  The  expenditures  have  been  merely 
deferred.  Their  very  postponement  will  be  sure  ultimately  to 
increase  them.  A  manager  may  refuse  to  make  needed  repairs 
in  order  that  the  cost  statements  may  look  well,  but  the  day  of 
reckoning  will  come. 

INSURANCE 

When  the  manager  has  done  his  best  to  enlarge  and  conserve 
the  property,  he  must  still  guard  against  its  crippling  or  destruc- 
tion by  those  fortuitous  acts  which  he  can  neither  foresee  nor 
prevent.  What  he  cannot  guard  against,  he  will  insure  against; 
paying  some  one,  better  able  to  bear  the  loss,  to  stand  the  risk 


INDUSTRIAL  ORGANIZATION  105 

of  loss.  Certain  possible  losses  of  this  kind  he  cannot  insure 
against.  A  stupid  or  malicious  employee  may  produce  damage 
that  is  uninsurable;  but  in  few  cases  can  such  loss  be  over- 
whelming. Damage  by  fire,  water,  cyclone,  or  boiler  explosion, 
to  materials  coming  or  going  by  land  or  water;  against  such  he 
may  if  he  will  obtain  guarantees  more  or  less  comprehensive.  It 
is  equally  important  for  him  to  protect  his  owners,  as  far  as 
may  be,  against  losses  by  claims  for  damages  on  account  of 
personal  injuries  sustained  by  employees  or  by  the  public 
through  the  acts  of  employees.  He  will  cooperate  with  indemnity 
companies  by  strict  adherence  to  their  rules  provided  for  action 
in  case  of  such  accident,1  just  as  he  may  cooperate  with  the  fire 

1  A  prompt  report  of  any  accident,  accompanied  with  names  and  addresses  of  witnesses, 
is  always  required.  The  law,  may  prescribe  the  filing  of  reports  with  some  state  official.  A 
written  statement  may  be  secured  from  a  person  injured,  as  to  the  cause  of  the  accident  and 
the  nature  of  the  injury.  Any  tools  or  parts  of  machines  which  have  figured  in  an  acc.dent 
may  be  marked  and  preserved  for  identification.  Photographs  showing  the  surrounding 
conditions  may  be  useful. 

Personal  injuries  to  employees  may  be  settled  by  (a)  re-employment  after  recovery;  (b) 
payment  of  money;  (c)  guarantee  of  continuous  re-employment  in  spite  of  disability. 

In  all  such  cases,  a  full  release  from  liability  is  usually  demanded  from  the  injured  person. 
Facilities  for  affording  "first  aid"  and  for  conveying  men  to  hospitals  must  be  regarded. 
'  The  subject  of  workmen's  compensation  (for  industrial  accidents)  is  receiving  no  less 
attention  than  the  equally  important  subject  of  prevention  of  such  accidents  by  proper 
safeguards.  The  American  Museum  of  Safety  Devices  maintains  in  the  Engineering 
Societies  Building,  29  West  39th  Street,  New  York,  a  permanent  exhibit  of  safety  appliances 
of  all  sorts.  Reference  should  be  made  to  the  paper  by  John  Calder,  "  The  Mechanical 
Engineer  and  the  Prevention  of  Accidents,"  in  the  Transactions  of  the  American  Society 
of  Mechanical  Engineers. 

The  law  has  been  seriously  unjust  to  the  workman  in  the  matter  of  compensation  for 
personal  injuries.  He  has  borne  too  large  a  share  of  the  losses  arising  from  accidents. 
This  has  been  due  in  large  measure  to  the  old  common-law  "fellow  servant"  doctrine, 
under  which — briefly  speaking — a  workman  is  deprived  of  adequate  redress  for  injuries 
sustained  by  reason  of  the  contributory  neglect  of  a  fellow  employee. 

The  present  program  of  the  reformers  is,  full  liability  for  damages  where  the  employer 
is  morally  wrong;  no  liability  where  the  moral  wrong  is  on  the  part  of  the  workman.  In 
those  cases  where  there  has  been  "fellow  servant"  negligence,  or  where  there  is  a  necessary 
risk  associated  with  the  trade,  graded  liability  for  compensation  is  proposed.  As  the  em- 
ployer must  pay  for  the  depreciation  of  his  plant,  so  also  must  he  pay  for  the  depreciation 
of  his  men;  but  in  order  to  more  fully  distribute  losses  of  the  third  and  least  avoidable 
class  it  is  proposed  that  fixed  payments  be  made  by  the  state  for  each  standard  injury,  the 
necessary  funds  being  provided  by  a  tax  upon  industrial  concerns. 

Workmen's  compensation  laws  embodying  these  or  similar  provisions  have  been  passed 
in  Ohio,  New  Jersey,  Kansas,  Massachusetts,  Wisconsin  and  New  York.  In  the  first  three 
states,  the  laws  have  not  yet  (September,  1911)  gone  into  effect.  In  Massachusetts,  the 
statute  has  been  declared  constitutional.  It  provides  for  voluntary  submission  to  the 
statutory  scale  by  any  workman  who  so  elects;  the  indemnities  are  then  paid  automatically 
without  the  necessity  for  an  action  at  law.  The  "fellow  servant"  doctrine  is  abrogated  by 
a  provision  of  the  statute,  which  thus  makes  it  the  employer's  interest  to  voluntarily  accede 
to  the  new  scale.  In  Ohio,  the  workman  pays  10  per  cent,  of  the  cost  of  indemnification. 
In  New  York,  the  law  has  been  declared  unconstitutional  by  the  Court  of  Appeals.  The 
Wisconsin  law,  like  that  of  Massachusetts,  provides  for  arbitration  at  the  options  of  em- 
ployer and  employee.  It  abrogates  wholly  the  "assumption  of  risk"  defence  and  partly, 
the  "fellow  servant"  defence.  These  defences  are  based  on  court  decisions  rather  than 
on  constitutional  provision.  The  Wisconsin  statute,  unlike  that  of  Massachusetts,  leaves 


106  WORKS  MANAGEMENT 

insurance  companies  (to  his  manifest  advantage  in  the  matter  of 
rates)  by  installing  automatic  sprinklers. 

Large  concerns  with  separated  plants  may  " carry  their  own 
insurance/'  The  works  will  not  all  burn  at  once;  a  total  loss 
at  one  of  them  might  not  be  crippling,  so  that  the  very  size  of 
the  organization  enables  it  to  distribute  its  own  losses  without 
recourse  to  insurance.  A  carefully  estimated  fund  should  in 
such  cases  be  set  aside  in  anticipation  of  losses.  As  this  fund 
will  grow,  withdrawals  may  occasionally  be  made  unless  the 
plant  also  grows. 

The  modern  theory  of  insurance  is  that  the  owner  shall  in  all 
cases  bear  a  part  of  the  risk.  This  is  accomplished  by  not 
insuring  at  full  value.  Stock  insurance  companies  are  ordinary 
business  corporations— in  the  mutual  companies  the  insured  plants 
are  part  owners.  They  participate  therefore  in  profits  or  losses. 
Many  of  the  mutual  companies  limit  their  operations  to  certain 
classes  of  plant,  and  lay  great  stress  on  their  physical  condition 
with  respect  to  fire  prevention.  Their  rates  may  in  such  cases 
be  lower  than  those  of  the  stock  companies,  but  the  cost  of  com- 
plying with  the  requirements  which  may  be  set  by  their  various 
inspectors  is  sometimes  a  serious  matter.1 

the  "contributory  negligence"  defence  unimpaired.  It  has  been  upheld  by  the  Supreme 
Court  of  the  State. 

Some  nineteen  state  legislatures  are  now  considering  the  question  of  industrial  insurance. 

Efforts  are  being  made  to  secure  the  passage  of  a  fedaral  law  by  Congress.  Compensation 
laws  should  of  course  be  uniform  in  all  the  states.  Opposition  to  the  proposed  enactments 
has  come  not  from  the  employers — the  plans  are  in  fact  a  protection  to  the  smaller  in- 
dustries— but  from  the  indemnity  companies,  which  regard  then  as  bringing  the  states  into 
competition  with  themselves.  The  progress  of  workmen's  insurance  and  compensation 
systems  in  Europe  is  summarized  in  the  24th  (1909)  Annual  Report  of  the  United  States 
Commissioner  of  Labor  (Washington,  1911). 


FIRE  LOSSES  IN  THE  UNITED  STATES 

1  In  the  year  1907,  the  average  fire  loss  per  capita  was  in  this  country  $2.51,  the  corre- 
sponding average  in  six  European  countries  being  33  cents,  while  even  in  Russia  it  was  only 
$1.16  (Bulletin  418,  United  States  Geological  Survey,  1910).  During  the  same  year, 
1449  persons  were  killed  and  5654  injured  by  fires  in  the  United  States.  The  annual  loss 
by  fire  has  steadily  increased  from  about  $70,000,000  in  1875-'80  to  from  $150,000,000  to 
$200,000,000  at  present;  the  last  figure  representing  a  waste  of  about  $23,000  per  hour, 
days,  nights  and  Sundays  included.  The  payment  of  insurance  does  not  wipe  out  the  loss; 
it  merely  distributes  it;  and  not  much  more  than  half  the  total  direct  losses  are  covered  by 
insurance.  No  insurance  protects  against  loss  of  profits.  We  pay  for  maintenance  of 
fire  departments  in  our  large  cities,  each  year,  $1.53  per  capita;  the  corresponding  average 
cost  in  ten  European  cities  of  about  the  same  size  is  only  20  cents.  Our  immense  invest- 
ments in  water  works,  it  is  estimated,  represent  a  total  capitalization  such  that  the  22  per 
cent,  attributable  to  fire  protection  amounts  to  $157,000,000.  The  total  cost  of  tires,  includ- 
ing direct  losses,  insurance  premiums,  water  works,  fire  departments  and  private  fire  protec- 
tion, but  not  including  losses  of  wages  and  profits  following  destruction  of  plant,  aggre- 
gates $450,000,000  annually. 

The  reason  is  primarily  the  use  of  timber  for  construction.     From  Europe  the  almost 


INDUSTRIAL  ORGANIZATION  107 

THE  GENERAL  FORMS  OF  INDUSTRIAL  OWNERSHIP 

A  business  may  be  conducted  by: 

1.  An  individual.1 

2.  A  partnership. 

3.  A  corporation. 

invariable  report  is  "no  wooden  buildings  in  the  city."  Two- thirds  of  our  1907  loss  was 
on  frame  buildings.  In  our  treeless  states,  the  loss  per  capita  was  $2.30;  in  states  endowed 
with  an  abundance  of  timber  it  was  $2  89. 

The  direct  losses  in  the  San  Francisco  fire  of  1906,  exclusive  of  earthquake  damage, 
probably  aggregated  $300,000,000.  The  city  had  been  built  with  narrow  streets  lined  by 
high  buildings  nearly  all  of  wood  or  of  wooden  frames.  These  were  badly  congested  and 
exposed,  with  excessive  wall  and  floor  openings  and  for  the  most  part  of  very  light  flimsy 
construction.  There  was  a  notable  absence  of  sprinklers  or  other  protective  devices;  the 
public  water  distribution  system  was  defective;  and  the  topography  and  meteorological 
conditions  of  the  city  were  such  as  to  increase  fire  hazard.  A  special  commission  of  in- 
surance experts  reported  just  six  months  before  the  fire  that  San  Francisco  "had  violated  all 
underwriting  traditions  and  precedents  by  not  burning  up."  In  fact,  its  whole  history  had 
been  one  of  numerous  fires  and  heavy  fire  losses.  When  the  final  conflagration  came,  an 
official  report  concluded  that  "no  other  result  .  .  could  .  .  have  been  expected." 
(United  States  Geological  Survey,  Bulletin  324.) 

Nothing  is  as  insidious  as  fire  hazard.  An  electric  cable  in  a  lead  sheath  seems  safe;  but 
an  insect  has  appeared  which  gnaws  through  these  sheaths.  An  electric  flat  iron  caused  a 
Joss  of  $1,250,000. 

The  campaign  against  fire  loss  includes  agencies  both  public  and  private.  In  the  former 
class  belong  municipal  fire  services  by  steamer  ("fire  engine"),  fire  boat,  high-pressure 
water  supplies  and  all  the  equipment  and  organization  of  a  paid  and  thoroughly  trained 
corps  of  men.  In  the  latter  are  comprised: 

1.  The  automatic  sprinkler  system  with  two  sources  of  water  supply.  2.  Watchman's 
or  thermostatic  alarm  systems.  3.  Inside  protection  by  pails,  small  hose,  extinguishers, 
etc.  4.  Outside  protection  by  private  hydrant  system  and  private  drilled  fire  brigade. 
5.  Protection  against  exposure. 

Insurance  Rates. — The  rate  of  insurance  is  expressed  in  cents  of  annual  premium  paid 
per  $100  of  insured  valuation.  Rates  in  each  district  are  fixed  by  a  local  rating  board,  for 
each  risk,  according  to  its  resemblance  to  or  departure  from  a  certain  standard  of  hazard 
contemplated  in  establishing  the  ' '  base  rate  "  for  the  district.  It  often  pays  to  modify  plans 
for  building  construction  to  meet  the  views  of  the  rating  boards  as  to  wall  thicknesses, 
heights  of  parapets,  etc.,  particularly  in  cities;  and  even  more  serious  questions  may  have 
to  be  considered  in  determining  as  to  a  proper  course  between  high  insurance  cost  (or 
refusal  to  insure)  on  the  one  hand  and  undesirable  construction  expense  or  limitation  of 
operating  conditions  on  the  other.  Monitors,  for  example,  expose  adjacent  roof  areas,  and 
metal  sash  and  frames  may  be  required  therein.  Every  opening  in  a  floor  or  wall  may  be 
penalized.  Automatic  fire  doors  on  the  latter  may  reduce  the  penalty,  but  an  opening 
bricked  up  means  insurance  money  saved.  There  is  a  penalty  for  a  bare  ceiling  which 
may  be  partially  avoided  by  the  use  of  fire-resisting  plaster.  The  mere  absence  of  white- 
wash from  an  exposed  ceiling  may  make  a  difference  of  5  or  6  cents  in  the  rate. 

For  each  risk,  the  rating  board  prepares  a  schedule  about  like  the  following  (extreme 
example) . 

1.  Base  rate $0.30 

2.  Excessive  area  $0.02,  walls  deficient  $0.06,  joists  and  posts  insufficient,   $0 . 04  .      0.12 

3.  Monitor  in  roof  $0.10,  roof  plank  and  floors  below  standard  $0.07 0.17 

4.  Floor  openings  $0.02,  elevator  $0.02,  stairway  $0.02 0.06 

5.  Partitions  $0.05,  steam  pipes  exposed  $0.50 0.55 

6.  Occupancy  $2.00,  shavings  vault  $0.50,  blower  $0.25,  ceilings  $0.06 2.81 

1  Many  very  large  enterprises  are  conducted  by  individuals.  Sometimes,  in  these  cases, 
the  business  is  called  a  "company"  or  "works,"  with  or  without  inclusion  of  the  name  of 
the  individual  owner.  In  such  instances,  the  responsibility  of  the  individual  owner  must 
be  properly  declared  before  some  public  officer. 


108  WORKS  MANAGEMENT 


To  a  corporation  of  controlling  magnitude  we  give  the  mean- 
ingless name,  a  "trust." 

PARTNERSHIP 

A  partnership  is  the  simplest  form  of  joint  ownership.  There 
may  be  any  number  of  owners  from  two  upward.  A  general 
partner  is  liable  for  the  firm's  debts,  without  limit;  a  special 
partner  is  liable  only  to  the  extent  of  his  contribution  to  the 
capital. .  Each  partner  contributes  something  to  the  partner- 

7.  Boiler  house  openings  $0.10,  doors  on  same  not  standard  $0.38 0.48 

8.  Absence  of  small  protective  equipment 0.80 

(Clarence  K.  Mowry  in  The  Factory,  August,  1910.)  Total, 5.29 

In  this  case,  items  2,  3,  and  4  could  scarcely  be  remedied  without  radical  reconstruction 
of  the  plant.  The  following  work  was  done:  a  partition  covered  with  tin  (5  cents,  item  5) ; 
the  basement  cleared  out  (50  cents  reduction,  "occupancy,"  item  6);  the  shavings  vault 
ventilated  by  a  flue  and  its  exhaust  blower  repaired "(75  cents,  item  6) ;  ceilings  whitewashed 
(6  cents,  item  6) ;  boiler  house  openings  provided  with  fire  doors  (38  cents,  item  7) ;  and  some 
barrels,  hose  and  pails  were  purchased  (80  cents,  item  8).  The  entire  cost  involved  was 
about  $500,  and  the  annual  rate  was  reduced  $2.54  thereby.  It  might  have  paid  to  re- 
arrange the  steam  piping  (item  5). 

Where  the  hazard  is  classed  as  "ordinary,"  the  following  clause  is  often  used  in  insurance 
policies  covering  buildings  and  contents: 

"In  consideration  of  the  rate  at  which  this  policy  is  written,  it  is  expressly  stipulated  that 
this  [insurance]  company  shall  be  liable  for  no  greater  proportion  of  any  loss  than  the 

amount  hereby  insured  bears  to  ....  per  cent,  of  the  actual  cash  value  of  the  property 

nor  for  more  than  the  proportion  which  this  policy  bears  to  the  total  contributing  insur- 
ance on  the  property." 

This  is  called  the  "Contribution  Clause"  or  "Reduced  Rate  Clause."  The  percentage 
left  blank  is  90  if  the  amount  of  insurance  covers  buildings  and  contents  as  a  whole;  or  80 
if  buildings  and  machinery  are  insured  in  an  amount  separate  from  that  which  covers 
stock.  Consider  the  following  conditions: 

a.  Buildings   and   stock  separately  insured;  the  former  for  $6000,    their  value  being 
$10,000.     A  fire  causes  a  building  loss  of  $4000.     The  first  provision  of  the  clause  limits  the 

6000 

amount  of  insurance  to  be  collected  to  —  —  X  $4000  =  $3000. 

083X10,030 

b.  With  the  same  insurance  and  valuation,  let  a  blanket  policy  be  assumed,  covering 
buildings   and   contents    (aggregate   valuation    $10,000,   amount  of  policy  $6000).     The 

insurance  company's  liability  is —  X  $4000  =  $2666 . 67. 

0  90X10,000 

In  the  first  case,  a  partial  loss  of  $4000  would  be  completely  covered  only  when  the  policy 
read  for  $8000;  or,  in  the  second  case,  for  $9000.  Most  losses  are  partial  losses,  and  most 
policies  give  only  partial  protection.  The  contribution  c  ause  (which  is  usually  accom- 
panied by  a  reduced  rate)  virtually  makes  the  assured  a  partner  with  the  insuring  company, 
compelling  him  to  assume  part  of  the  risk. 

While  buildings  or  structures  are  in  process  of  erection,  both  owner  and  contractor  have 
insurable  interests  therein.  There  are  two  ways  of  protecting  these  interests.  In  some 
contracts,  it  is  provided  that  the  contractor  shall  "maintain  insurance  policies  amounting 
to ....  per  cent,  of  the  actual  value  of  all  materials  or  completed  work,  payable  to  owner 
or  contractor  as  interest  may  appear."  If  a  fire  occur  before  the  owner  has  made  a  payment 
on  account,  insurance  adjustment  is  purely  a  matter  for  the  insurance  companies  and  the 
contractor  If,  however,  he  has  made  payments,  his  interest  in  the  insurance  policies  is 
evidenced  by  the  acknowledgements  of  such  payments.  The  second  method  is  to  stipulate 
that  the  contractor  is  to  protect  his  own  interests  only.  The  owner  then  sees  to  it  that  every 
payment  he  makes  is  at  once  supplemented  by  a  policy  of  insurance  in  his  own  interest. 
The  contractor's  bond  is  a  warrant  against  delinquency  on  his  part. 


INDUSTRIAL  ORGANIZATION  109 

ship:  money,  technical  knowledge  or  skill,  commercial  asso- 
ciations and  acquaintances  or  the  like;  it  is  not  necessary  that 
all  contribute  money.  All  partners,  however,  participate  in 
profits  in  such  proportion  as  is  agreed  upon. 

Unlike  a  corporation,  a  partnership  is  not  a  legal  entity;  it  is 
obliged  to  act  (in  formal  matters)  through  its  individual  members. 
The  objects  and  scope  of  the  partnership  should  be  defined  in  its 
contract;  but  the  members  should  consider  also  what  presump- 
tive scope  it  may  have,  since  the  public  would  be  warranted  in 
dealing  with  one  of  the  partners  in  all  such  matters  and  the 
partnership  might  be  bound  by  contracts  made  with  the  public 
by  an  unauthorized  partner  even  though  the  subject  matter  of 
such  contract  were  not  one  contemplated  in  the  scope  of  the 
partnership.  The  acts  of  the  partnership  are  determined  by  a 
majority  vote  or  majority  interest  of  the  general  members; 
special  partners  have  ordinarily  no  active  voice  in  the  control. 

A  man  may  become  a  member  of  a  partnership  without  desir- 
ing it  or  even  knowing  it.  If  he  advance  money,  expecting  to 
share  profits  and  losses,  he  becomes  legally  a  partner  of  the  man 
to- whom  he  advances  the  funds;  and  bears  the  full  responsi- 
bility of  a  general  partner  in  that  individual's  acts. 

A  partnership  may  be  terminated  by  the  date  of  limitation 
written  in  the  contract;  it  is  necessarily  terminated  by  the  death 
or  insolvency  of  a  member;  by  mutual  agreement;  or  by  judicial 
action.  A  partner  cannot  assign  his  partnership  interest  to 
another.  He  must  call  for  a  distribution  of  assets  and  retire. 
If  he  become  insolvent,  his  creditors  call  for  such  distribution  of 
assets  in  order  that  they  may  reach  his  share.  When  a  partner 
is  determined  to  retire,  and  a  basis  of  settlement  cannot  be 
reached,  he  may  ask  the  courts  to  appoint  a  receiver  to  wind  up 
the  business.  Partnerships  of  two  are  sometimes  dissolved  in 
this  way:  one  member  fixes  a  price  at  which  he  is  willing  either 
to  buy  or  sell  the  business;  the  other  then  decides  whether  he 
will  buy  or  sell  at  that  price,  and  produces  the  money  or  retires 
as  the  case  may  be.  Upon  termination  of  a  partnership,  the 
assets  are  distributed  in  the  following  order:  the  debts  of  the  firm 
are  paid ;  any  money  loaned  by  its  members  to  the  firm  is  repaid ; 
the  capital  put  into  the  firm  by  the  members  is  repaid;  and  any 
remaining  assets  are  distributed  in  accordance  with  the  pro- 
portions agreed  upon  for  division  of  profits. 


HO  WORKS  MANAGEMENT 

THE  CORPORATION 

A  corporation  is  an  artificial  person,  created  by  legal  process 
under  certain  regulations  fixed  by  the  various  states.  Unlike 
a  real  person,  it  may  engage  only  in  such  acts  as  its  charter 
prescribes.  The  existence  of  the  corporation  is  evidenced  by  the 
charter,  granted  at  the  petition  of  such  persons  as  are  interested. 
These  persons  and  their  successors  have  no  unlimited  individual 
liability  for  the  acts  or  debts  of  the  corporation;  an  officer  may, 
however,  make  himself  liable  by  committing  an  unlawful  act. 

This  artificial  person  or  legal  fiction  is  empowered  to  engage 
in  certain  kinds  of  business,  sometimes  on  condition  of  making 
certain  reports  regarding  the  general  outcome  of  that  business 
to  the  state  which  creates  it.  It  is  owned,  in  most  cases,  by  a 
large  number  of  individuals  called  stockholders,  whose  extent 
of  ownership  is  evidenced  by  the  number  of  shares  of  stock  they 
hold.  The  total  number  of  shares  to  be  issued  is  stated  in  the 
certificate  of  incorporation.  Stockholders  participate  in  earnings 
and  in  the  management  in  proportion  to  their  stock  ownership. 
There  may  be  two  classes  of  stock,  preferred  and  common;  the 
former  may  have  certain  prior  rights  in  any  eventual  distribution 
of  assets:  it  usually  confers  no  voting  power;  it  may  be  guaranteed 
a  certain  dividend  out  of  each  year's  profits  before  any  dividend 
is  paid  for  that  year  on  common  stock.  If  a  continuity  of  such 
dividend  is  guaranteed  (unpaid  dividends  being  a  lien  prior  to 
any  payments  on  common  stock)  the  preferred  stock  is  called 
cumulative. 

The  management  of  the  corporation  is  in  the  hands  of  its 
directors,  elected  by  the  stockholders,  and  more  directly  still 
in  charge  of  officers  elected  by  the  directors.  Ordinarily,  the 
individual  liability  of  any  stockholder  in  the  affairs  of  an  industrial 
corporation,  whether  he  be  an  officer  or  not,  is  limited  to  the  nom- 
inal or  par  value  of  the  shares  which  he  owns.  Unprofitable  policies 
on  the  part  of  the  corporation  may  wipe  out  the  value  of  the 
common  stock,  but  can  do  no  further  harm  to  its  owner.  It  is 
obvious  that  to  the  ordinary  small  investor,  stock  ownership 
in  a  corporation  has  some  attractions  not  accompanying  general 
participation  in  a  partnership. 

ORGANIZING  AN  INDUSTRY  ON  CORPORATE  LINES 

Suppose  A  to  propose  the  building  of  a  paper  mill.  He  talks 
with  B  and  C,  who  each  contribute  $50,000.  The  A.  B.  C.  Co, 


INDUSTRIAL  ORGANIZATION  111 

is  organized  with  a  capital  of  $1,000,000,  divided  into  10,000 
$100  shares.  Of  these  each  of  the  incorporators,  A,  B  and  C, 
receives  $100,000.  The  balance  is  put  in  the  hands  of  A  or  his 
banking  friends  to  sell.  The  treasury  of  the  corporation  con- 
tains $100,000  cash.  No  money  is  contributed  by  A;  he  is  the 
promoter.  His  expert  knowledge,  or  ownership  of  patent  rights,1 

i  Patents. — Ownership  of  patent  rights  may  give  a  controlling  position  in  the  market  to 
many  kinds  of  industry.  Many  concerns  regularly  encourage  their  employees  to  develop 
new  inventions.  The  cost  of  securing  patents  is  in  such  cases  assumed  by  the  company, 
while  the  inventor  assigns  to  the  company  the  right  to  use  the  invention  in  its  business. 
This  right  is  not  in  all  cases  an  exclusive  right. 

A  patent  is  a  grant,  by  the  sovereign  power.of  the  exclusive  right  to  make,  use  and  sell  any 
device  that  is  pronounced  to  be  new  and  useful — an  invention.  Mere  "good  ideas"  do  not 
constitute  an  invention;  a  change  in  size,  the  omission  of  an  element,  the  substitution  of 
equivalents,  the  introduction  of  new  combinations  without  new  methods  of  operation;  these 
things  in  general  do  not  confer  patentability.  A  change  in  material  used  is  a  patentable 
improvement  only  when  such  change  is  associated  with  a  variation  in  process.  The  new 
use  of  an  old  thing — unless  in  a  distinctly  different  line  of  application — does  not  constitute 
an  invention. 

To  be  new,  an  invention  must  show  present  local  novelty.  An  abandoned  pre-use,  or 
current  use  abroad,  does  not  destroy  novelty.  The  existence  of  old  models  or  unpublished 
drawings  does  not  stamp  an  invention  as  "not  new."  A  thing  practically  useless  becomes 
"new"  when  made  useful.  With  these  exceptions,  a  thing  cannot  be  called  new  if  a  single 
individual  has  known  and  used  it. 

To  be  useful,  the  invention  need  not  show  superiority  over  existing  objects;  it  need  not  be 
more  economical.  Beauty  is  regarded  as  utility.  The  use  must  be  beneficial;  things 
injurious  to  morals  or  social  policy  are  not  patentable. 

The  application  for  a  patent  takes  the  form  of  a  petition  to  the  United  States  Patent 
Office  (a  bureau  of  the  Department  of  the  Interior).  It  is  in  the  formulation  of  the 
application  that  the  skill  and  knowledge  of  the  inventor  count  most  strongly  in  his  favor. 
He  should  thoroughly  know  the  essentials  and  underlying  principles  of  his  invention,  and 
should  not  assume  that  his  solicitors  will  properly  state  them.  The  application  is  accom- 
panied by  drawings  and  specifications,  both  of  which  must  conform  to  certain  established 
rules.  The  drawings  are  merely  illustrative;  the  operation  of  the  invention  is  fully  described 
in  the  specifications.  The  gist  of  the  application  is  in  the  "claims"  which  terminate  it. 
These  are  a  statement  of  what  the  inventor  conceives  to  be  new  and  useful  in  his  invention. 
They  are  framed  by  the  solicitor  with  extreme  care,  and  as  carefully  scrutinized  by  the  inven- 
tor. A  patent  confers  no  rights  not  "claimed."  Features  not  essential  should  not  be 
"claimed"  as  part  of  the  invention.  Claims  should  not  introduce  unnecessary  limits  in 
description;  if  a  part  may  be  driven  equally  well  by  a  gear,  belt  or  chain,  no  one  of  these 
methods  of  driving  should  be  specified. 

Following  the  application,  an  answer  is  returned  to  the  inventor  by  the  patent  office.  This 
will  cite  previous  patents,  which  the  applicant  must  then  examine.  If  he  can  show  that 
his  invention  is  not  invalidated  by  such  patents,  the  issue  of  patent  will  be  made  in  due 
course.  The  period  between  answer  and  issue  is  the  critical  period  in  determining  the  scope 
and  probable  value  of  the  patent  on  a  useful  invention.  Claims  may  be  disallowed;  the 
applicant  is  bound  by  his  original  claims. 

Several  appeals  are  possible  from  the  decision  of  the  patent  office  officials. 

A  question  of  priority  of  two  pending  applications  constitutes  an  interference.  Interference 
litigation  is  highly  expensive.  It  is  conducted  by  attorneys  who  make  a  specialty  of  such 
work;  rarely  by  ordinary  patent  solicitors.  In  usual  procedure,  each  litigant  submits  a 
statement  before  seeing  the  application  of  the  other.  The  burden  of  proof  is  on  the  later 
applicant.  The  underlying  principle  governing  decisions  seems  to  be  that  the  man  who 
first  conceived  the  thing,  if  diligent  in  perfecting  it,  has  a  prior  right  to  the  man  who  conceived 
it  later,  even  though  the  latter  first  worked  it  out. 

The  patent  (which  may  cover  an  art,  machine,  manufacture  or  composition)  gives  an 
absolute  property  right  which  may  on  no  ground  be  confiscated.  It  is  an  infringement  to 


112  WORKS  MANAGEMENT 

or  brilliancy  of  idea,  or  ability  to  float  stock,  have  induced  B 
and  C  to  put  each  their  $50,000  against  his  talents,  and  all  three 
accept  equal  blocks  of  the  stock. 

At  this  early  stage,  the  concern  is  really  worth  $100,000,  and 
it  has  stock  obligations  of  $300,000.  Now  A  goes*but  and  sells 
the  $700,000  of  treasury  stock  at  par,  less  a  banking  house 
commission  of  $100,000,  taken  in  stock.  The  stock  liabilities 
are  now  $1,000,000  and  the  cash  assets  $700,000. 

Construction  is  begun.  As  soon  as  the  land  is  paid  for,  it  is 
mortgaged  to  a  trust  company  and  bonds  are  issued  for  as 
large  a  proportion  of  the  purchase  price  as  can  be  managed. 
Say  the  land  costs  $200,000;  the  mortgage  and  bond  issue  may 
be  $100,000.  As  the  construction  of  the  plant  proceeds,  more 
bonds  are  issued,  until  at  completion  the  works  have  cost 
$1,200,000;  of  which  $500,000  has  been  paid  out  of  cash  in  the 
treasury,  and  $700,000  is  covered  by  first  mortgage  bonds. 
The  plant  now  begins  business  with  $200,000  of  working  capital. 
Its  total  assets  are,  plant  $1,200,000;  cash  $200,000.  Its  liabil- 
ities are,  stock  $1,000,000;  bonds  $700,000.  There  is  a  deficit 
of  $300,000,  whiqh  is  due  to  the  cost  of  floating  the  enterprise. 

make  for  one's  own  use  a  patented  article  without  permission  from  the  owner  of  the  patent. 
This  right  is  granted  for  a  period  of  17  years. 

Foreign  patents  are  in  some  countries  granted  for  comparatively  short  terms.  One  result 
is  that  when  the  foreign  patent  expires  the  invention  is  imported.  This  "discouragement 
to  home  industries"  is  avoided  by  a  provision  of  law  which  makes  the  United  States  patent 
expire  with  the  foreign  patent,  should  the  latter  be  first  obtained.  The  arrangement  so  works 
out  that  American  inventors  do  not  seek  foreign  patents  excepting  on  articles  intended  to  be 
sold  abroad.  A  reissue  is  practically  a  new  patent.  If  the  inventor  feels  insufficiently 
protected,  he  may  be  permitted  to  surrender  his  patent  and  receive  a  new  one,  based  on  new 
claims,  good  for  the  unexpired  term  of  the  original  patent. 

A  caveat  is  a  filed  description  of  a  proposed  invention,  submitted  as  evidence  of  priority 
and  diligence  in  anticipation  of  possible  interference.  Its  effect  is  that  the  inventor  is  given 
three  months'  notice  before  any  conflicting  application  is  considered.  The  caveat  lasts  for 
one  year,  and  the  time  may  be  extended. 

The  title  to  a  patent  may  be  impaired  by  a  license  or  grant  or  by  joint  inventorship. 
A  constructing  mechanic  is  not  a  joint  inventor.  One  who  furnishes  capital  to  an  inventor 
does  not  thereby  become  a  joint  inventor.  The  patent  should  be  issued  in  the  inventor's 
name.  Any  inventor  should  keep  a  daily  record  of  his  plans  and  work. 

Assignments  of  part  ownership  in  a  patent  may  confer  great  privileges.  A  proper  assign- 
ment provides  for  profit -sharing  and  constitutes  a  virtual  partnership.  A  grant  gives  exclu- 
sive proprietorship  in  some  one  state.  An  article  sold  in  that  state  may  be  carried  to  and 
used  in  another.  A  license  merely  gives  the  right  to  make,  use  or  sell,  exclusively  or  other- 
wise, in  a  certain  place  for  a  stated  time.  In  selling  grants  or  licenses  to  corporations,  the 
inventor  must  protect  his  interests  by  a  formal  contract  and  preferably  also  by  becoming  a 
member  of  the  board  of  directors  of  the  corporation. 

A  man  employed  to  improve  machinery  is,  so  to  speak,  engaged  as  an  inventor,  and  his 
inventions  belong  to  his  employer.  If  not  so  employed,  his  inventions  may  be  his  private 
property.  But  his  title  thereto  may  be  impaired  if  he  occupies  himself  therewith  during 
time  paid  for  by  the  employer. 

"Trade  secrets"  are  usually  so  easily  infringed  without  detection  that  they  are  rarely 
patented.  (See  Trans.  A.  S.  M.  E.,  xxix,  15.) 


INDUSTRIAL  ORGANIZATION  113 

B  and  C  each  received  $100,000  stock  for  $50,000  cash;  de- 
ficit, $100,000;  A  received  $100,000  for  no  cash;  the  bankers 
received  $100,000  in  commissions. 

The  works  begins  operation.  The  first  year,  its  receipts  are 
$1,500,000;  its  operating  expenses  are  $900,000.  It  pays  out  of 
the  gross  earnings  of  $600,000,  $350,000  for  interest  on  bonds; 
and  with  the  remainder  declares  a  dividend  of  10  per  cent. 
($100,000)  on  the  common  stock  and  puts  away  $150,000  as 
surplus  or  reserve.  When  this  reserve  has  sufficiently  accumu- 
lated, it  may  be  employed  to  pay  off  bonds  as  they  mature;  or 
if  the  business  bring  in  a  higher  rate  of  return  than  the  interest 
on  the  bonds,  the  latter  may  never  be  paid,  the  net  earnings 
being  wholly  distributed  to  the  stockholders  after  the  surplus 
has  reached  the  desirable  safe  amount.  In  many  cases,  accu- 
mulated surplus  is  invested  in  improvements  so  that  ultimately 
the  physical  value  of  the  property  may  exceed  its  capitalization 
liability.  When  the  reverse  condition  holds,  the  stock  is  said 
to  be  "watered." 

A  stockholder  who  wishes  to  terminate  his  interest  in  the 
company  has  merely  to  sell  his  stock.  In  a  small  local  corpora- 
tion this  might  not  be  easy;  in  a  corporation  whose  stock  is 
"listed"  on  the  exchanges,  it  can  be  done  in  five  minutes.  The 
corporation  itself  can  go  out  of  existence  only  by  disposition  of 
its  assets  and  the  distribution  of  their  proceeds  to  the  creditors 
and  stockholders.  A  corporation  is  a  permanent  sort  of  thing; 
deaths  and  bankruptcies  do  not  destroy  it. 

When  a  corporation  cannot  pay  its  debts,  including  interest 
on  its  bonds,  a  receiver  may  be  appointed  by  the  courts  to  dis- 
pose of  its  assets.  When  bondholders  are  secured  by  first 
mortgages  on  the  property,  they  have  a  preferred  claim  on  such 
of  the  physical  assets  as  are  covered  by  the  mortgage.  They 
may  apply  for  a  foreclosure  sale,  applying  the  proceeds  of  such 
sale  to  paying  off  their  bonds.  Many  properties  must  in  the 
very  nature  of  things  be  kept  in  operation.  Railroads  are  an 
example.  The  least  margin  of  earnings  over  operating  cost  will 
help  pay  bond  interest.  Bondholders  will  therefore  keep  the 
road  running  for  this  reason,  as  well  as  to  help  maintain  unim- 
paired its  physical  value. 

In  case  of  bad  management,  the  road  may  default  in  its 
bond  interest,  although  with  proper  organization  it  need  not 
have  done  so.  The  bondholders  may  then  form  a  stock  company 


114  WORKS  MANAGEMENT 

to  buy  the  property  themselves  under  the  foreclosure  sale  and 
reorganize  it  to  suit  their  own  views.  This  has  been  the  history 
of  more  than  one  railroad. 

In  our  previous  illustration  of  the  paper  mill,  an  additional 
stock  issue  might  be  suggested  on  one  of  these  grounds:  to 
provide  money  for  extensions  or  improvements;  to  make  the 
dividend  rate  look  less  exorbitantly  high;  or  to  provide  money 
for  retiring  bonds. 

For  the  first  of  these  purposes  a  new  stock  issue  is  perfectly 
legitimate,  although  a  bond  issue  would  accomplish  the  result 
at  less  cost  and  with  less  disturbance  to  the  value  of  existing 
stock.  For  the  second,  if  there  is  so  large  a  surplus  that  enough 
is  accumulated  each  year  to  pay  the  dividend  on  the  proposed 
new  stock,  there  should  seem  to  be  no  valid  objection  on  the 
part  of  present  stockholders.  If  the  surplus  is  small,  the  issuance 
of  new  stock  will  depreciate  the  value  of  present  stock.  The 
issuance  of  stock  in  order  to  retire  bonds  means  that  more 
earnings  will  be  needed  if  a  reasonable  dividend  is  to  be  paid  on 
the  whole  stock  issue;  for  bonds  bear  low  rates  of  interest,  com- 
paratively speaking. 

Generally,  therefore,  increase  of  stock  issue  is  not  permitted 
excepting  by  assent  of  the  stockholders;  and  it  is  quite  common 
for  such  stock,  when  issued,  to  be  allotted  to  present  share- 
holders, at  a  reduced  price,  in  proportion  to  their  present  holdings. 
If  any  of  the  stockholders  are  not  in  a  position  to  purchase  their 
allotments,  they  may  sell  their  "  rights;"  and  the  value  of  these 
"  rights"  suggests  one  of  the  several  ways  in  which  large  corpora- 
tions sometimes  "  cut  melons."  For  example,  the  Pennsylvania 
Railroad  company  issued  a  10  per  cent,  allotment  of  new  stock 
at  par,  when  the  market  price  of  its  stock  was  122.  The  holder 
of  100  full  shares  had  then  the  right  to  buy  10  shares  at  par; 
his  " rights"  were  thus  worth  about  $220,  and  were  negotiable 
at  some  such  price. 

FORMS  OF  INDUSTRIAL  ORGANIZATION 

Although  its  immaterial  organization  is  concededly  the  most 
important  feature  of  the  industrial  plant,  there  is  no  part  of  its 
being  in  which  standards  differ  more  widely.  The  plan  of  or- 
ganization will  in  all  cases  depend  largely  upon  the  men  avail- 
able to  make  that  organization.  Men  cannot  be  purchased,  like 


INDUSTRIAL  ORGANIZATION  115 

machinery,  to  comply  with  exact  specifications.  The  seeker 
for  men  is  in  the  position  of  one  who  in  the  wilderness 
searches  for  trees  with  which  to  make  poles  for  his  tent. 
He  has  a  clearly  denned  ideal,  perhaps,  but  does  not  expect 
to  realize  it.  He  takes  what  may  answer  for  his  purpose 
and  adapts  his  design  to  his  materials.  Technically,  the 
organization  should  be  planned,  and  the  men  found  who  can 
fit  in  that  plan.  Actually,  it  is  necessary — for  a  time  at  least, 
and  often  in  permanency — to  lay  out  an  organization  so  as  to 
most  effectively  utilize  the  talent  available. 

Moreover,  ideals  of  organization  will  differ  in  different  in- 
dustries. The  differentiating  " fundamental  ratio"  suggested 
in  Chapter  II  will  account  for  variations  in  organization  type  as 
well  as  in  equipment  and  policy.  Take  the  case  of  a  building 
contractor  whose  investment  in  plant  is  small  (as  compared 
with  that  of  a  manufacturer),  but  who  turns  over  his  capital 
several  times  in  the  year.  His  business  is  one  in  which  the  funda- 
mental ratio  is  low.  We  may  therefore  expect  that  fixed  charges 
will  be  a  relatively  small  element  in  his  cost  and  that  his  principal 
aim  will  be  toward  operative  economy — low  prime  cost  of  con- 
structive work  which  he  undertakes.  He  will  have  a  force  of 
expert  supervisors  in  the  various  trades  and  will  hold  these  men 
or  the  best  of  them  even  in  dull  times.  The  salaries  of  such 
men  become  in  a  sense  fixed  charges,  however;  and  if  they  are, 
as  usually,  a  large  proportion  of  his  total  cost,  he  will  take  con- 
tracts at  small  profit  when  necessary  in  order  to  keep  the  men 
employed.  The  rank  and  file  of  employees,  both  productive  and 
non-productive,  will  be  recruited  or  discharged  rapidly  as  the 
work  on  hand  warrants;  practices  which  will  be  facilitated  by 
including  in  the  supervisory  organization  men  thoroughly  famil- 
iar with  the  different  trades.  He  will  have  little  use,  however, 
for  a  high  grade  operating  engineer  to  supervise  his  power  ex- 
penditures or  for  a  good  shop  mechanic  to  care  for  his  scanty 
equipment  of  cheap  buildings. 

BUILDING  UP  THE  ORGANIZATION 

Of  vital,  if  not  in  all  cases  of  immediate  importance,  is  the 
matter  of  developing  men  for  positions  of  authority.  No  in- 
dustry can  be  permanently  sucessful  unless  consideration  is 
given  this  matter.  Some  of  our  longest-existing  and  most 


116  WORKS  MANAGEMENT 

successful  corporations  are  noted  for  the  attention  which  they 
devote  to  it. 

The  man  trained  in  applied  physical  science — the  chemist  or 
the  engineer — is  admittedly  the  most  promising  subject  for 
training  in  management.  His  education  fits  him  to  deal  with 
the  problems  involved  in  the  economical  operation  and  care  of 
machinery  and  in  the  effective  utilization  of  material.  To  make 
his  prospects  certainties  he  must  now  demonstrate  his  capacity 
to  handle  men  and  to  deal  with  those  large  questions  of  policy, 
which  have  been  suggested,  in  a  masterful  way.  A  large  pro- 
portion of  graduates  of  technical  schools  (a  proportion  still  in- 
creasing) occupy  administrative  positions  in  manufacturing  and 
public  service  works.  It  would  be  interesting  to  examine  the 
reasons1  for  this;  some  are,  the  ideals  of  thoroughness  and  de- 
tailed study  which  commonly  prevail  in  our  technical  schools; 
the  training  in  the  quantitative  weighing  of  evidence;  the  habit 
of  drawing  conclusions  from  comparisons;  the  emphasis  laid  upon 
the  idea  of  efficiency;  the  use  of  instruments  of  record  and 
graphical  representations;  the  development  of  a  thirst  for  in- 
formation and  a  spirit  of  original  investigation;  the  training  in 
rapid  execution;  and  the  universal  agreement  to  share  experience 
which  is  characteristic  of  the  engineering  profession.  These 
ideals  are  of  course  never  fully  realized;  but  they  are  approxi- 
mated by  the  best  students,  those  who  later  attain  to  positions 
of  executive  authority.2 

1  See  the  writer's  paper,  Engineering  Management  of  Industrial  Works,  in  the  Engineering 
Magazine,  1901. 

2  Technical  Training,  Its  Successes  and  Failures. — It  is  scarcely  worth  while  to  attempt  to 
justify  these  assertions,  which  manufacturers  generally  have  by  their  action  shown  that  they 
believe.     The  young  technical  graduate  is  intermittently  under  fire,  but  pretty  steadily  in 
demand.     The  age  from  20  to  25  is  an  uncomfortable  age  with  any  young  person;  one  in 
which  he  seeks  his  level  with  some  disturbance  to  surrounding  bodies.     College  professors 
are  not  unaware  of  the  deficiencies  of  technical  training.     They  debate  the  subject  more  than 
anyone  else  (see,  for  example,  the  proceedings  of  the  Society  for  the  Promotion  of  Engineering 
Education).     Their  most  common  fault  is  perhaps  that  they  are  too  eager  to  fit  their  courses 
to  current  demand. 

Many  works  make  special  efforts  to  secure  technically  trained  men,  as  either  regular  or 
"special"  apprentices.  They  have  great  difficulty  in  finding  a  satisfactory  number  of  men, 
and  in  keeping  them  when  they  get  them.  The  college  graduate  already  represents  an 
investment  of  $2000  or  so  in  training.  As  a  rule  he  must  be  as  quickly  as  possible,  after 
graduation,  a  self  sustaining  producer.  Some  companies  have  been  particularly  successful 
in  training  such  men  for  positions  of  authority.  They  pay  them  a  living  wage  from  the 
start,  and  expect  to  wait  a  little  while  for  results. 

Two  classes  of  criticism  have  had  wide  circulation  during  the  past  year  or  two.  WTith  that 
one  class  which  condemns  wholesale  all  higher  educational  and  professional  training,  in 
colleges  and  technical  schools,  for  physicians  as  well  as  for  engineers,  we  need  not  deal.  The 
other  class  may  be  illustrated  from  remarks  of  Mr.  F.  W.  Taylor,  himself  a  graduate  of  a 
technical  school  (see  American  Machinist,  Nov.  15,  1906,  and  The  Bent,  January,  1910). 


INDUSTRIAL  ORGANIZATION  117 

Some  works  maintain  special  apprenticeship  departments  for 
the  "breaking  in"  of  young  technical  graduates.  When  in  these 
a  genuine  and  serious  effort  is  made  to  so  teach  men  the  business 
that  they  may  be  fitted  for  gradual  promotion  to  administrative 
positions,  the  results  are  good  from  all  standpoints.  In  those 
works  where  because  of  lack  of  attention  or  the  deliberate  desire 

Mr.  Taylor  finds  that  young  engineering  graduates  are  discontented  and  unhappy,  not  worth 
much  for  the  first  two  years  after  graduation;  that  they  lack  an  earnest  and  logical  purpose; 
have  had  more  liberty  than  is  commonly  granted  to  or  is  good  for  human  beings;  that  they 
have  been  habitually  idle:  have  not  learned  team  work  or  obedience;  have  suffered  by  not 
coming  in  contact  with  men  working  for  a  living;  that  they  are  no  "smarter"  than  even  a 
poorly  educated  workman.  He  regards  athletics  (purified)  as  the  one  interest  in  which  the 
student  shows  earnestness  of  purpose;  favors  the  man  who  "works  his  way  through  college"; 
and  recommends  a  six  months'  course  in  an  outside  machine  shop  early  in  the  college 
course. 

Mr.  Taylor  has  trained  several  hundred  technical  men  and  invariably  selects  such  men  for 
large  positions  when  he  can;  he  concedes  that  those  employers  who  have  the  most  extended 
experience  with  them  are  the  most  eager  to  secure  them;  and  we  are  prepared  to  concede 
most  of  his  statements  as  statements  of  fact  (though  not  of  all  the  facts) ;  looking  to  his 
avowed  policy  for  a  suggestion  of  the  conclusion  which  all  of  the  facts  warrant  him  in 
reaching.  We  will  go  farther.  The  student's  characteristic  defects  are  evidenced  even  in 
his  own  "student  activities,"  like  athletics.  He  usually  lacks  the  kind  of  ability  that 
"carries  the  message  to  Garcia."  He  is  a  putterer,  an  atrocious  waster  of  his  own  and 
other  men's  time;  he  thinks  an  excuse  is  as  good  as  a  result  always,  and  his  excuses  are 
often  quite  transparent.  He  is  prone  to  pity  himself.  He  thinks  he  is  woefully  over- 
worked, when  he  scarcely  knows  what  real  productive  work  is.  He  resents  monotony, 
forgetting  that  practically  all  of  life  is  monotonous.  He  is  a  mere  absorber,  not  a  producer. 
(The  young  technical  man  should  be  interested  in  the  results  of  a  statistical  research  made 
by  Mr.  J.  L.  Gobaille  into  the  causes  for  executive  promotion.  An  analysis  of  a  large  num- 
ber of  cases  showed  the  following  approximate  relative  weights  of  various  factors  in  produc- 
ing increase  of  authority  and  salary: 

Detailed  knowledge  and  ability  to  design 25 

Executive  initiative  ability 20 

Total  abstinence 15 

Promptness 10 

Versatility. 5 

Youth 10 

American  citizenship 10 

Church  membership 5 

The  present  writer  would  put  intellectual  alertness  as  a  foremost  underlying  qualification.1) 
These  things  are  all  in  a  measure  true.  So  would  they  be  true  of  any  young  man  kept  out 
of  productive  industry  until  the  age  of  23  or  thereabout.  Suddenly  thrown  into  industry  at 
that  age,  our  engineering  school  boys  are  just  old  enough  to  be  a  little  slow  in  self-adjust- 
ment. They  are  often  dissatisfied,  and  think  their  employers  unappreciative  and  exacting. 
Sometimes  the  employers  are  just  that.  They  frequently  do  not  know  just  what  to  ex- 
pect of  an  engineering  graduate;  don't  know  how  to  use  him.  (It  is  worth  while,  this 
learning  how.)  They  put  him  on  work  of  mere  boys  while  they  make  up  their  minds 
To  discriminate  between  round  and  square  p-gs  and  holes  is  a  great  art. 

Not  all  young  engineers  expect  to  enter  the  machine  shop.  That  is  only  one  field  even 
for  the  mechanical  engineer.  An  engineering  course  which  unduly  emphasizes  the  machine 
shop  idea  is  one-sided.  An  engineering  school  aims  primarily  to  develop  a  certain  type  of 
mind;  it  does  not  (though  this  is  commonly  forgotten)  occupy  itself  exclusively  with  the 
question  of  the  man's  immediate  earning  power.  Engineering  education  may  be  as  truly 
liberal  as  any  type  of  education  that  has  ever  existed  on  earth.  Liberal,  that  is,  in  the  sense 
of  man-making. 

There  is  an  occasional  type  of  engineering  student  that  one  would  think  would  exactly  suit 
the  critics  of  his  class.  It  is  the  man  who  is  good  with  his  hands,  fond  of  the  laboratory 


118  .WORKS  MANAGEMENT 

to  commercially  exploit  the  apprentice  he  is  engaged  on  work  in 
which  he  is  immediately  remunerative,  without  regard  to  his 
future,  the  results  are  wholly  bad.  The  young  man  is  led  to 
expect  something  which  it  is  not  intended  he  shall  receive.  He 
had  much  better — perhaps  had  better  in  any  case — go  in  with 
the  rank  and  file  under  no  special  understanding  or  agreement, 
and  get  his  head  above  the  general  level  by  virtue  of  capacity 
alone — if  he  can. 

ORGANIZATION  AXIOMS 

1.  While  the  form  of  organization  necessarily  depends  upon 
the  personalities  available,  it  should  as  far  as  possible  be  inde- 
pendent of  fluctuations  in  personality.     The  loss  of  one  man 
should  not  wreck  the  administrative  machinery. 

2.  The  duties  prescribed  for  the  elements  in  an  organization 

and  the  shop,  apparently  well-provided  with  common  sense;  but  who  hates  problems  and 
"theory"  and  prefers  to  compete  with  the  hand- worker  rather  than  become  a  genuine 
brain  worker  He  may  be  the  best  man  after  graduation  (if  he  graduates)  for  the  first  year 
or  two.  But  he  has  missed  the  main  point.  He  would  have  done  better  never  to  have 
wasted  four  years  in  school. 

The  characteristic  weakness  which  the  writer  has  found  in  young  technical  men  is  timor- 
ousness.  They  are  actually  afraid,  strangely  enough,  to  use  what  they  have  learned.  Pos- 
sibly criticism  has  unnerved  them.  A  man  should  employ  his  knowledge,  apply  his ' '  theory  " ; 
we  cannot  have  too  much  of  that  theory  which  is  an  explanation  of  facts  by  their  causes. 

Men  get  about  what  they  deserve  in  the  world;  so  that  the  best  justification  for  the  tech- 
nical school  is  in  the  records  of  graduates.  Any  bright  boy  can  get  an  engineering  educa- 
tion nowadays.  To  borrow  money  for  the  purpose  is  a  wise  and  surely  profitable  in- 
vestment. The  sad  difficulty,  in  many  cases,  is  in  the  question  of  cost  and  time  for  pre- 
paration. The  writer  has  talked  with  many  men  of  mature  age  who  would  have  been  pre- 
pared to  sacrifice  all  they  had  in  savings  and  position  if  by  doing  so  they  could  have  pur- 
sued a  real  course  in  engineering;  but,  in  the  great  majority  of  cases  these  men  have  had 
to  be  told  that  years  of  preparatory  study  would  first  be  necessary. 

Classification  of  Engineering  Schools. — There  is  some  confusion  in  the  public  mind 
regarding  the  comparative  grades  of  engineering  schools.  There  are  good  and — not  so  good — 
schools  in  all  grades,  but  there  is  a  fairly  clear  distinction  between  what  is  properly  called  an 
engineering  school  and  what  is  (however  worthy,  rich  or  successful)  the  distinctly  lower 
grade,  trade  or  industrial  school.  The  essential  characteristics  of  the  former  are: 

1.  It  is  either  part  of  a  university  or  one  of  the  few  schools  which  teach  engineering  or 
applied  science  alone. 

2.  Its  course  will  be  of  four  years  duration  (in  residence,  instruction  being  daytime 
instruction) . 

3.  It  will  confer  bachelor's  or  engineering  degrees;  in  some  localities,  as  in  New  York, 
under  state  sanction. 

4.  It  may  be  one  of  the  "accepted"  institutions  (defined  as  "colleges")  of  the  Carnegie 
Foundation.     This  is,  however,  a  positive  but  not  a  negative  test;  denominational  institu- 
tions and  (originally)  state  universities  were  not  included  in  the  Carnegie  list  of  "colleges." 
There  were  in  July,  1911,  seventy-two  "accepted"  institutions  on  the  Carnegie  list,  but  there 
are  certainly  more  than  seventy-two  genuine  colleges  (technical  and  other)  in  the  country. 

There  are  a  few  of  the  highest  grade  engineering  schools  which  admit  graduates  only  to 
their  courses;  in  these,  the  course  of  study  may  be  one  of  less  than  four  years.  Perhaps  the 
commonest  ear-mark  of  the  "technical  graduate,"  properly  called  such,  is  some  knowledge 
of  the  calculus;  but  it  is  probabb  that  in  the  great  majority  of  cases  the  extent  of  this  knowl- 
edge becomes  rapidly  diminished  with  advancing  years! 


INDUSTRIAL  ORGANIZATION  119 

should  be  so  automatically  inter-related  as  to  make  minimum 
demand  upon  the  extremely  fallible  human  memory.  If  A 
forgets  to  send  C  to  B7  something  should  necessarily  call  B's  atten- 
tion to  that  fact. 

3.  Authority  and  responsibility  should  be  clearly  denned  and 
coordinated.     If  A  is  responsible  for  the  cost  of  repairs,  B  must 
not  be  allowed  to  order  a  new  roof. 

4.  Every  individual  should  be  able  to  reach  a  "man higher  up" 
without  being  obliged  to  travel  far. 

5.  Organizations  do  not  spring  fully-armed  from  the  head  of  the 
divinity.     They  must  grow  and  adjust  themselves,  and  should 
not  be  expected  to  grow  too  fast. 

6.  Great  changes  in  form  of  organization  should  be  made  with 
extreme  reluctance. 

7.  Close  association  and  frequent  conference  between  superior 
and  subordinate,  and  among  those  of  corresponding  rank,  should 
be  encouraged. 

8.  An  effective  organization  must  stimulate  by  the  force  of 
example.     Every  man  should  have  specific  and  ascertain  able 
individual    duties    which    all    men    can    see  that  he  performs 
efficiently. 

9.  Each  man  must  be  made  to  feel  a  sense  of  personal  pro- 
prietorship in  the  work  over  which  he  has  authority. 

10.  The  atmosphere  must  be  one  of  mutual  consideration  and 
appreciation.     Orders  are  orders;  business  is  not  palavering; 
but  it  seldom  pays  to  reveal  the  hand  of  iron  when  the  glove  of 
silk  may  cover  it. 

1 1 .  The  system  of  administration  must  adequately  reward  the 
competent;  and  stimulate,  penalize  or  eliminate  the  unfit. 

12.  It  should  provide  a  spur  and  prod  for  every  man;  not  one 
that  needlessly  irritates  him,  but  one  that  rouses  him  to  do  his 
best.     After  all,  men  differ  but  little  in  their  capacities;  where 
they  differ  is  in  the  uses  they  make  of  their  capacities. 

THE    DIFFERENTIATION    OF    RESPONSIBILITY 

The  writer's  ideal  of  organization  is  that  which  makes  each 
official  an  absolute  monarch  in  his  field.  To  work  out  such  an 
idea,  it  might  be  said,  implies  ideal  men.  Yet  it  is  practicable,  or 
substantially  so,  to  commit  a  given  work  to  a  given  man,  leaving 
methods  to  him  but  holding  him  rigorously  accountable  for  re- 


120  WORKS  MANAGEMENT 

suits.     Some  of  the  factors  which  complicate  this  simple  ideal 
may  be  mentioned: 

a.  Unmeasured  and  Unproductive  Work. — The  man  who  is 
responsible  for  the  cost  of  repairs  may  also  have  the  care  of  the 
fire-preventive  equipment.    The  time  and  attention  he  devotes  to 
this  counts  for  nothing  in  his  " record"  as  kept  by  the  cost  de- 
partment.    He  would  rather  have  nothing  to  do  with  it.     Some 
men  may  have  duties  of  such  nature  that  no  formal  judgment 
of  results  is  possible. 

b.  Conditions  Vary. — The  chief  engineer  may  have  his  record 
spoiled  by  a  coal  strike  which  doubles  the  cost  per  ton.     Con- 
sider two  points:  minor  variations  in  conditions  should  be  ignored. 
We  may  refuse  to  discuss  them.  We  must  all  take  chances.     If 

General 

\ 

Colonels 

Majors 

Captains 
Lieutenants 


Sergeants 
dvates 

DIAGRAM  OF  PURE  LINE  ADMINISTRATION. 


/r 

/  \  Pri 


a  man  is  always  unlucky  we  had  better  try  another  man.  Also : 
let  us  keep  detailed  records  both  of  cost  and  of  consumption. 
If  it  is  the  price  of  coal  which  accounts  for  a  high  unit  cost  of 
power,  the  records  will  show  that  to  be  the  fact,  and  the  chief 
engineer  will  not  be  blamed. 

c.  Excuses. — One  department  may  hamper  another  by  delays 
or  wastes.     This  will  be  detected  and  should  be  prevented  in  a 
well-managed  plant.     Adequate  system  will  detect  delays  and 
place  the  responsibility.     No  interested  party's  statement  as  to 
such  delays,  offered   as    an   excuse   for   low  efficiency,  will  be 
accepted. 

d.  Punishment. — Unless  low  efficiency  is  penalized  the  whole 
plant  will  degenerate.     Lack  of  graded  punishments  is  as  serious 


INDUSTRIAL  ORGANIZATION 


121 


a  matter  as  the  absence  of  a  system  of  graded  rewards.  Reward 
and  punishment  must  to  some  extent  be  matters  of  public 
knowledge. 

LINE  ORGANIZATION 

If  we  consider  the  case  of  an  army  organized  exclusively 
through  the  successive  subordination  of  general,  colonel,  major, 
captain,  lieutenant,  sergeant  and  private,  we  have  an  example  of 
pure  line  administration,  which  may  be  graphically  depicted  as  on 
page  121. 

This  is  the  oldest  and  most  common  form  of  organization,  but 
probably  never  exists  in  the  simple  and  rigid  unmodified  con- 
dition shown.  The  simplest  and  most  usual  modification  con- 
sists in  the  introduction  of  a  group  of  specialists  advisory  to  the 
chief  executive,  but  without  formal  administrative  duties.  The 
following,  for  example,  is  the  organization  adopted  for  a  large 
electrical  manufacturing  works: 

I  Accounting. 


President, 


1st.  Vice- 
president. 


Auditor. 


Legal. 


[  Cost-keeping. 

f  Production  clerk. 


Paymaster.  Superintendent,  assistants,  general  foremen , 

Purchasing.  foremen. 

Superintendent  of  foundry. 
Shipper. 

Works  manager,    -j  Rate  fixer. 
Inspectors. 
Works  engineer. 
Employment  agent. 

f  Clerical  staff. 
Storekeeper.    -I  Stock  men. 

[  Receiving  clerk, 
f  Engineering. 
2nd  Vice-     J  Sales, 
president.   \  Correspondence. 
[  Construction. 

In  this  scheme,  the  backbone  of  the  line  organization  is  clearly 
shown  through  President,  1st  Vice  President,  Works  manager 
and  Superintendent.  The  balance  of  the  administration  is 
partly  subdivisional  and  partly  advisory.  When  industries 
grow  very  large,  the  general  administration  must  be,  as  here, 
divided.  The  purchasing  agent,  for  example,  must  be  of  the 
best  type;  so  must  the  works  manager;  neither  is  big  enough  to 
boss  the  other.  Each  is  a  master  in  his  field.  There  is  a  clear 
differentiation  of  authority  and  responsibility  throughout  the 
entire  scheme. 

But  consider  now  the  next  plan  (page  122). 

Here  there  is  no  single  responsibility  anywhere  between  the 


122 


WORKS  MANAGEMENT 


Stockholders Directors 


President 


Vice-President 


Secretary 


Treasurer 


Cost  Clerk 
Sales  Agent 
Accountant 
Order  Clerks 
Stenographers 
Purchasing  Agent 


Chief  Engineer 
Chief  Electrician 
Chief  Draftsman 
Receiving  Clerk 
Stock  Clerk 
Shipping  Clerk 
Foreman 
Inspectors 
Time  Keepers 


stockholders  and  the  workmen.  The  general  manager  is  a 
supernumerary.  Each  of  the  three  managers  has  at  least  two 
bosses.1  Not  one  of  the  four  executive  officers  has  definite 
control  over  one  man.  The  cost  and  order  clerks,  purchasing 
agent,  receiving,  stock  and  shipping  clerks  and  inspectors  have 
each  two  superiors,  which  is  just  one  too  many.  This  is  an 
example  of  extremely  decayed  line  organization;  the  kind  that 
grows  up  in  the  absence  of  planning.  The  strict  line  plan  shown 
in  the  first  (army)  diagram  would  be  greatly  preferable. 


DIVISIONAL,  DEPARTMENTAL  AND  STAFF  ORGANIZATION 

It  is  admitted,  however,  that  strict  line  or  divisional  organiza- 
tion has  its  defects.  Take  the  case  of  a  railway.  For  each 
operating  division  there  will  be  a  superintendent,  a  master 
mechanic,  a  maintenance  of  way  engineer,  etc.  If  there  are 
six  divisions  there  will  be  six  such  sets  of  officials.  We  cannot 
afford  to  pay  them  the  salaries  necessary  to  obtain  the  highest 
grade  men;  they  will  be  merely  administrative  clerks,  without 
special  or  expert  technical  knowledge  of  the  highest  grade  in 
their  branches  of  the  work. 

Yet  a  large  railway  must  have  a  thoroughly  competent  civil 
engineer  in  charge  of  maintenance  of  way.  If  it  cannot  afford 
one  for  each  division,  it  will  at  least  have  one  for  the  whole  road, 
calling  him,  perhaps,  the  chief  engineer.  So  also  it  will  have  a 

1  There  are  two  useful  words — "boss"  and  "job" — of  such  great  significance  that  their 
slightly  colloquial  flavor  is  to  be  deplored.  Both  are  full  of  meaning,  worthy  of  respectable 
association  No  substitutes  quite  take  their  place. 


INDUSTRIAL  ORGANIZATION 


123 


superintendent  of  motive  power,  a  glorified  master  mechanic, 
to  settle  the  larger  mechanical  problems  for  the  whole  road. 
The  pure  divisional,  or  line,  organization  was  this: 


General  manager. 


f  Division  superintendent. 

•j  Master  mechanic. 

(  Engineer  of  maintenance  of  way. 

f  Division  superintendent. 

j  Master  mechanic. 

[  Engineer  of  maintenance  of  way. 

f  Division  superintendent. 

•j  Master  mechanic. 

I  Engineer  of  maintenance  of  way. 


Division  A. 


Division  B. 


Division  C. 


and  this  has  in  some  cases  been  made  (if  possible)  more  divisional 
still  by  giving  the  division  superintendent  authority  over  his 
division  master  mechanic  and  engineer. 

The  revised  plan  follows.  This  plan  must  stand  or  fall  on  the 
ground  of  workability.  Can  the  cooperation  of  the  three  division 
officers  be  obtained  without  destructive  friction  when  the  im- 
mediate superiors  of  these  men  are  different  individuals  located 
perhaps  a  thousand  miles  away?  In  railway  operation  the 
answer  is  in  the  affirmative;  first  because  of  the  strictness  of 
discipline  that  has  been  inculcated  for  a  generation  and  second 
because  the  direction  of  evolution  has  clearly  defined  the  limits 
of  each  official's  authority  and  responsibility.  From  the  division 
officers  downward  the  organization  is  of  a  nearly  pure  line  type; 


C  Division  Superintendent  A 

"General  Superintendent  <  B 

I         "  "  C. 

f  Master  Mechanic  A 

General  Manager  ^  Superintendent  of  Motive  Power  <  B 

(    "  "        C 

f  Engineer  of  Maintenance  of  Way   A 

Chief  Engineer  J        "          "  "  "       " 

1 

^        „  „  n  »  » 


Division  A 


Division  B 


Division  C 


Possibly  this  condition  of  railway  operation,  or  possibly  the 
gradual  trend  toward  independence  of  the  engineer  force  (with 
regard  to  navigating  officers)  in  steamship  service,  may  have 
called  attention  to  the  need,  in  large  organizations,  for  depart- 
mentalism. In  such,  it  works  best  to  have  an  engineer  bossed 


124  WORKS  MANAGEMENT 

by  an  engineer,  an  operating  man  by  an  operating  man,  and  so  on. 
One  of  the  simplest  applications  of  such  policy  is  in  the  "  com- 
mittee system/'  an  example  of  which  is  shown  below.  The 


Works  manager. 


Manufacturing  committee. 


Production  department  (planning). 
Cost  department. 
Works  engineer. 

Electrical 

superintendent. 
General  superintendent. 

Mechanical  \ 

superintendent.  J 


"manufacturing  committee"  is  made  up  of  representatives  of 
the  four  works  departments;  it  may  include,  also,  subordinates 
of  the  general  superintendent ;  for  its  function  is  deliberative  and 
advisory,  not  mandatory.  It  considers  proposed  improvements, 
and  questions  of  organization,  method  or  policy;  making  (in 
spite  of  old-fashioned  ideas  of  discipline)  recommendations, 
through  the  works  manager,  to  the  executive  committee  of  the 
board  of  directors.  There  may  be  subsidiary  department 
committees  as  well,  standing  in  the  same  relation  to  depart- 
mental superintendents  as  the  manufacturing  committee  does 
to  the  works  manager.  The  effort  is  made  to  have  on  these 
committees  representatives  of  every  class  of  interest  in  the  works; 
and  when  these  have  representation  on  the  manufacturing 
committee,  every  department  is  placed  thereby  in  close  informal 
touch  with  the  works  manager  and  the  directorate. 

The  -results  are:  a  human  contact  with  the  man  far  down;  a 
getting  together  of  men  which  may  help  to  offset  departmental 
antagonism;  a  check  on  arbitrariness  of  superintendence.  The 
chief  aim  is  probably  that  which  leads  to  departmentalism 
on  railroads:  that  the  maker  of  bricks  may  state  his  case  to  the 
maker  of  bricks  and  that  the  man  who  shovels  coal  may  deal  with 
one  who  know~s  what  it  is  to  shovel  coal.  The  chief  objection  is 
that  discipline  may  be  impaired  and  the  authority  of  the  line 
organization  undermined. 

The  ultimate  result  of  departmental  and  committee  control 
is  an  organization  which  tends  to  the  form  on  page  125. 

At  c,  is  the  executive  in  control.  Under  him  are  the  staff 
advisers  b,  b,  b,  each  of  whom  (like  the  three  departmental 
chiefs  on  a  railroad)  is  in  charge  of  some  one  phase  of  the  work. 
At  a,  a,  a,  a,  are  the  men  farther  down.  Each  man  has  many 


INDUSTRIAL  ORGANIZATION  125 

masters:  one,  perhaps,  who  sees  that  he  is  on  hand  and  keeps 
busy;  another  who  tells  him  how  fast  to  run  his  machine  and  what 
tool  to  use;  another  who  compels  him  to  keep  his  machine  clean 
and  properly  oiled,  and  so  on.1  Whereas  line  organization 
branches  out,  staff  organization  (the  type  now  considered) 
focuses.  Staff  organization  puts  at  the  top  experts  in  each 
phase;  the  best  men  who  can  be  obtained  on  power,  repairs, 
cutting  speeds,  belts,  material  despatching,  handling  men,  etc. 


Line  organization  demands  all-round  men  for  the  high  positions, 
and  when  in  the  larger  works  such  men  of  sufficiently  high  grade 
cannot  be  found,  staff  organization  is  essential.  It  has  its 
defects.  No  man  can  effectively  serve  two  masters,  but  the  de- 
fects are  minimized  in  exact  proportion  to  the  clearness  of 
differentiation  of  function  of  the  staff  experts.2 

The  modern  industry  must,  as  we  think,  have  both  line  and 
staff  organization:  the  latter  superimposed  on  the  former,  and 
differing  from  the  former  in  that  it  accomplishes  its  work  by 
persuasion  founded  on  knowledge  rather  than  by  law  backed 
by  force.  Staff  experts  must  be  exceptionally  high  grade  men; 
but  an  effective  line  organization  (if  one  ever  existed)  would  de- 
mand men  of  almost  superhuman  characteristics. 

SELLING  SYSTEMS 

To  keep  his  plant  running,  the  general  manager  must  sell 
his  output.  There  are  four  recognized  methods  of  selling  the 
product  of  a  factory: 

a.  To  the  consumer  through  traveling  or  located  representa- 
tives. 

1  In  introducing  the  more  recent  "profit-sharing"  wage-systems,  for  example,  four  staff 
officials  are  usually  contemplated;  the  gang  boss,  who  despatches  the  work;  the  speed  boss, 
the  inspector,  and  the  repair  boss. 

2  Line  organization,  too,  has  its  defects.    According  to  Mr.  Emerson's  picturesque  state- 
ment (too  forcible,  we  think)  it  is  usually  "autocratic  authority  at  the  top — delegated  au- 
thority and  imposed  responsibility  all  down  the  line,  and  anarchy  everywhere." 


126  WORKS  MANAGEMENT 

b.  To  the  consumer  by  mail. 

c.  To  jobbers  and  dealers. 

d.  To  agencies. 

Selling  was  once  regarded  as  one  of  those  fine  arts  that  defied 
rules  and  standards  and  could  be  discussed  only  by  the  initiated. 
It  is  now  being  reduced  to  a  system  and  a  science.  Salesmen 
are  formally  trained  from  suitable  raw  material.  Sales  records 
are  kept  with  the  same  detail  and  thoroughness  as  records  of 
manufacturing  cost.  Selling  is  being  reduced  to  a  business  basis, 
and  bribery  as  an  aid  to  accomplishment,  with  exorbitant 
expense  accounts  as  necessarily  associated  evils,  is  now  discoun- 
tenanced. The  salesman — especially  the  engineering  salesman — 
is  a  higher  type  of  man  than  he  used  to  be.  His  is  a  difficult  art, 
one  in  which  the  attainment  of  results  is  often  chiefly  a  matter  of 
chance;  his  position  is  hazardous,  he  is  productively  short-lived; 
and  if  he  is  successful  he  ought  to,  and  does,  receive  a  high  reward. 

The  salesman  must  thoroughly  know  his  goods  and  must 
believe  in  them.  He  lives  closer  to  the  factory  than  he  used  to; 
he  keeps  the  factory  in  touch  with  the  requirements  and  preju- 
dices of  the  ultimate  consumer.  His  manager  will  plan  demon- 
stration meetings  and  conventions  where  a  carefully  worked  out 
program  will  be  carried  on  for  his  benefit. 

THE  SALESMAN'S  RECORD 

The  salesman's  responsibility  is  to  sell  profitably.  A  record 
will  be  made  of  his  gross  sales  and  unit  prices  obtained.  He 
may  daily  report  all  attempts,  with  reasons  for  failure  or  state- 
ments of  success.  He  must  know  what  ideal  is  in  mind  for  him; 
what  products  it  is  most  necessary  to  sell,  and  if  possible  what 
quantity  should  be  sold  in  his  territory  in  a  given  time.  He 
must  be  posted  on  stocks  carried  and  sufficiently  so  on  produc- 
tive conditions  that  he  may  intelligently  discuss  questions  of 
time  of  delivery  with  his  customers.  The  manager  should  know 
the  distribution  of  consuming  capacity,  so  that  he  can  consider 
daily  whether  the  channels  for  outflow  of  his  product  are  being 
properly  kept  open.  By  prescribing  the  volume  of  sales  in  each 
territory  he  treats  the  market  like  his  own  plant,  as  a  link  in  the 
conduit  system  of  production.  By  prescribing  limits  of  selling 
price  and  selling  expense,  and  steadfastly  adhering  to  these  ideals, 
he  virtually  standardizes  his  profits  in  the  same  way  as  he  aims 
to  standardize  costs. 


INDUSTRIAL  ORGANIZATION  127 

WHOLESALING 

When  goods  are.  sold  to  dealers,  it  must  be  remembered  that 
they  are  to  sell  them  again,  and  that  they  must  make  a  profit. 
Under  ideal  conditions,  the  manufacturer  would  sell  to  jobbers 
(wholesalers)  only,  or  to  dealers  (retailers)  only,  as  the  case  may 
be.  Under  most  conditions,  he  has  to  sell  to  both  and  to  the 
consumer  directly  as  well.  He  must  then  "protect"  the  dis- 
tributor by  charging  the  other  men  a  higher  price;  if  the  price  to 
the  consumer  is  $1.00,  for  example,  that  to  the  dealer  might  be 
80  cents  and  that  to  the  jobber  70  cents.  The  profit  to  the 
wholesaler  is  usually  less  than  that  to  the  retailer,  because  the 
former  needs  a  less  elaborate  equipment  in  show-room  and  sales 
people;  he  deals  with  things  in  bulk.  Usually  the  differentiation 
in  price  is  made  excessive;  that  is,  in  the  example  assumed,  the 
wholesaler  would  expect  to  sell  to  the  retailer  say  for  78  cents, 
and  the  retailer  to  the  consumer  perhaps  for  95  cents. 

In  many  industries,  the  product  is  always  sold  to  the  consumer, 
and  no  such  differentiation  of  price  is  necessary. 

AGENCY 

Selling  methods  often  give  rise  to  problems  connected  with  the 
subject  of  agency.  In  law,  agency  is  a  contract  between  one 
(a  principal)  who  delegates  authority  to  act  for  him,  and  another 
(an  agent)  who  acts  under  such  delegated  authority.  Agency 
may  be  general,  covering  all  affairs,  or  all  affairs  of  a  particular 
kind,  or  special,  when  the  scope  is  specifically  limited.  Limi- 
tations of  agency  concern  outsiders  only  when  they  are  made 
aware  of  such  limitations.  The  act  of  the  agent,  within  the  pre- 
scribed limitation  of  his  powers,  is  legally  the  act  of  the  principal; 
the  former  has  no  individual  responsibility.  Agency  may  be 
conferred  either  prior  or  subsequent  to  the  performance  of  a 
described  act.  Conference  of  authority  to  accomplish  a  pre- 
scribed result  implies  a  grant  of  authority  to  use  reasonable 
means  necessary.  An  agent  must  not  profit  by  his  acts  as  an 
agent  in  any  way  other  than  that  prescribed  in  his  contract. 
A  principal  may  and  should  disavow  unauthorized  acts  of  an 
agent.  Public  notice  should  be  given  of  the  termination  of  an 
agency. 

The  branch  sales  office  of  a  manufacturing  concern  is  usually 
in  charge  of  a  sales  manager,  who  may  be  an  agent  empowered  to 


128  WORKS  MANAGEMENT 

contract  for  the  sale  of  product.  In  some  cases  he  has  no  such 
formal  authority,  ratification  of  contract  being  kept  in  the  hands 
of  the  general  officers.  He  may  not  even  have  authority  to 
purchase  necessary  office  supplies,  but  in  many  instances  a 
sufficient  number  of  precedents  will  accumulate  to  make  the  acts 
of  the  sales  office  binding  upon  the  organization. 

CONSIGNMENTS 

Sometimes  goods  are  sent  to  jobbers  or  retailers,  not  as  the 
result  of  a  sale,  but  merely  that  they  may  endeavor  to  sell  them. 
Such  a  shipment  is  a  consignment.  Shipments  of  farmers  to 
commission  merchants  are  in  the  nature  of  consignments.  When 
goods  are  consigned  to  some  firm,  that  firm  becomes  for  the  time 
being,  the  agent  of  the  manufacturer.  Its  authority  and  respon- 
sibility should  be  clearly  defined,  so  that  there  may  be  no  ques- 
tion as  to  the  price  at  which  the  goods  may  be  sold,  their  insur- 
ance, or  other  vital  matter. 

INTEGRATED  INDUSTRIES 

Industrial  management  has  been  in  recent  years  profoundly 
modified  by  the  growth  of  large  corporations  having  many  works. 
In  the  greater  number  of  cases  these  have  originated  by  the 
combination  of  existing  plants,  each  owner  or  set  of  owners 
surrendering  his  or  their  ownership  in  one  plant  in  return  for 
shares  in  the  integrated  organization. 

To  harmonize  conflicting  interests  and  finally  effect  such  a 
combination  is  a  gigantic  task,  a  task  never  quite  satisfactorily 
completed.  Each  individual  owner  must  be  given  what  he 
agrees  to  accept  as  his  just  share  in  the  total  stock;  many  of 
them  wish  to  have  important  posts  in  the  management  of  the 
new  corporation;  many,  perhaps,  are  bound  by  contracts  with 
their  officials  (or  do  bind  themselves  at  the  eleventh  hour) ,  which 
the  new  organization  must  honor  no  matter  how  ill  they  fit  in 
with  its  own  plans. 

In  consequence,  integration  brings  about  problems,  and  may 
cause  losses,  peculiar  to  itself.  The  anticipated  "economies  due 
to  consolidation"  are  not  automatically  realized.  They  must  be 
worked  for,  like  other  good  things. 

The  integration  which  we  are  considering  is  not  of  that  kind 
occasionally  practised  throughout  our  industrial  history,  where 


INDUSTRIAL  ORGANIZATION  129 

neighboring  industries  have  united  in  some  one  or  more  of  their 
activities.  It  is  an  integration  which  ignores  or  abolishes 
geographical  lines,  putting  under  one  management  works  located 
perhaps  thousands  of  miles  apart.  One  of  the  first  of  the 
new  problems  which  it  confronts  has  therefore  to  do  with 
transportation. 

An  individual  manufacturer  usually  has  one  plant  to  which  he 
must  bring  all  raw  material  and  from  which  he  must  ship  prod- 
uct. The  integrated  industry  has  many  plants;  and  it  must 
consider,  in  the  light  of  transportation  costs, 

a.  From  which  territory  it  may  best  s  apply  each  mill  with 
material. 

b.  From  which  mill  it  should  ship  to  each  market  its  product. 

A  mine  sells  its  ore  to  the  smelter  which  offers  the  highest  re- 
turns, transportation  charge  considered.  A  smelter  buys  its  ore 
from  whatever  source  supplies  it  most  cheaply.  Combine  the 
mine  and  the  smelter;  the  attitude  of  the  new  corporation  toward 
other  mines  and  other  smelters  will  now  be  determined  by  a  new 
policy. 

Let  us  go  further:  A  corporation  owns  many  mines  and  smel- 
ters. The  smelters  produce  product  and  by-product  from  the  ore. 
There  is  a  transportation  cost  between  ore  and  smelters,  between 
smelters  and  metal  market,  and  between  smelter  and  by-product 
market.  Until  conditions  are  standardized — and  they  never  are 
completely  standardized — a  rather  complicated  calculation  must 
be  made  in  arriving  at  the  price  to  be  charged  on  a  proposed 
production  order — a  calculation  which  must  take  account  of  the 
particular  producing  mine,  the  particular  smelter,  the  cost  of  ore, 
the  price  realized  for  by-products,  and  the  three  freight  rates. 

Such  problems  as  these  warrant  the  creation  of  what  is  prac- 
tically a  new  functionary  under  integrated  organization — the 
traffic  manager  or  supervisor  of  transportation.  There  are  in- 
dustries in  which  the  transportation  cost  exceeds  the  cost  of 
labor  and  supplies  for  mill  operation.  In  these,  the  traffic 
manager  is  an  important  factor  in  production  economy. 

Cost  keeping,  in  the  large  corporations,  takes  on  a  new  aspect. 
Methods,  systems,  and  records  will  be  now  compared  and  only 
the  fittest  allowed  to  survive.  Records  will  become  comparative 
as  well  as  chronological.  The  unit  cost  of  keeping  costs — the 
expense  of  maintaining  the  statistical  department,  as  related  to 
the  work  which  it  does — will  be  greatly  reduced  because  the  work 


130  WORKS  MANAGEMENT 

becomes  more  repetitive.  A  margin  of  funds  may  thus  be  avail- 
able for  employing  a  higher  type  of  statistician  than  could  be 
afforded  by  any  of  the  old  constituent  works.  In  general,  how- 
ever, the  chronological  type  of  cost  comparison  (see  Chapter  III) 
will  be  given  less  prominence  than  before.  Historical  statistics 
are  a  dead  language.  Side-by-side  comparisons  of  mill  operation 
are  alive,  and  the  data  for  analysis  of  the  facts  they  show  are  at 
hand. 

The  purchasing  department,  too,  in  a  large  aggregation  of 
works,  may  be  more  competently  organized  and  more  economic- 
ally administered. 

Insurance  becones  a  large  matter;  an  expert  may  be  employed 
to  look  after  it.  The  business  aspect  alone  requires  special 
experience  and  training,  and  the  construction  work  associated 
with  sprinkler  and  hydrant  systems  and  fire-resisting  types  of 
building  demands  some  degree  of  engineering  ability. 

A  high  grade  chief  engineer  to  supervise  the  general  department 
of  power  generation  will  be  found  needed;  and  in  general,  the 
whole  tendency  following  integration  is  toward  the  introduction 
in  the  organization  of  high-grade  staff  officials,  having  jurisdiction 
not  over  geographical  territory  but  over  certain  items  of  operation 
and  cost. 

A  typical  organization  might  be  as  below: 


f  Purchasing  agent. 

J  Insurance  manager. 
Traffic  manager, 
manager.       1  Chief  engineer. 

Statistical  department. 

President.-!  I  MiU  manage,     {  Mil1 

bales  [    superintendents. 

manager. 
Accounting  department. 


Here  the  five  non-productive  officials  subordinate  to  the 
general  manager  form,  with  the  mill  manager,  the  staff  or  advis- 
ory committee.  Each  of  these  five  men  has  authority,  within 
his  sphere,  over  the  mill  superintendents.  The  last  look  to  the 
mill  manager  for  direction  as  to  matters  of  production;  to  the 
chief  engineer,  as  to  matters  of  power  and  repairs;  and  so  on. 
The  system  is  not  ideal;  the  authority  of  the  five  staff  men  may  not 
be  sufficiently  decisive;  the  mill  superintendents  have  too  many 
bosses;  but  it  is  the  best  we  have. 


INDUSTRIAL  ORGANIZATION  131 

THE  NEW  TYPE  OF  WORKS  MANAGER 

The  works  manager  of  the  old  regime  was  a  general  supervisor, 
left  comparatively  free  from  matters  of  detail  and  occupied 
mainly  with  questions  of  policy.  His  responsibility,  authority, 
and  freedom  of  action  were  great.  The  precisely  reverse  con- 
dition has  been  brought  about  by  integration;  and  men  who 
developed  under  the  old  system  do  not  easily  adapt  themselves 
to  the  new. 

The  works  manager  now  is  a  local  man  with  local  interests, 
without  the  broad  view  necessary  to  enable  him  to  decide 
questions  of  policy,  concerning  which,  indeed,  new  data  are  now 
at  hand.  Instead  of  providing  good  judgment  and  courage  for 
his  subordinate  engineer  and  repairman  and  purchasing  agent, 
he  is  himself  spurred  from  above  by  men  of  these  kinds  holding 
high  staff  positions  in  the  general  office.  He  must  often  do 
things  in  his  plant  which  will  injuriously  affect  his  cost  record, 
for  the  sake  of  the  business  as  a  whole.  He  used  to  expect  just 
this  sort  of  thing  from  his  department  chiefs — subordination  of 
their  departments  in  the  interest  of  the  whole  works — but  never- 
theless the  shoe  pinches  now. 

In  the  past,  operating  cost  was  only  one  of  the  criterions  by 
which  the  manager  was  to  be  judged.  To-day  it  is  everything. 
Once  he  was  a  general  manager.  Now  he  is  a  shop  superintend- 
ent. At  least  this  is  the  way  he  feels  about  it.  If  he  is  too  old  to 
learn,  he  retires;  and  the  new  type  of  works  manager  succeeds 
him.  This  is  the  man  with  the  pruning-knife  for  costs,  not  the 
stout  well-dressed  magnate  of  former  days,  but  the  young  man 
with  his  sleeves  turned  up  who  knows  what  is  going  on  everywhere 
in  the  works,  and  why.  He  is  an  " executive  officer" — one 
who  does  things;  not  a  directing  head.  The  place  for  the  mag- 
nate— if  he  has  a  place — is  in  the  general  office;  not  in  the  bustle 
and  noisy  rhythm  of  the  mill. 

THE  ORGANIZATION  OF  LABOR 

It  is  proper  to  consider  here  the  workingman's  ideals  of  organ- 
ization as  well  as  the  employer's,  for  workingmen  are  getting 
quite  systematically  organized.  We  may  look  at  this  matter  in 
either  of  two  ways:  from  the  dispassionate  standpoint  of  the 
student  of  industrial  conditions,  or  from  the  selfishly  interested 
standpoint  of  the  employer. 


132  WORKS  MANAGEMENT 

The  labor  organization  problem  is  almost  always  discussed 
with  ignorance,  prejudice,  or  indifference — or,  strangely  enough, 
with  all  three. 

In  the  beginning  of  things  industrial,  employers  were  men  who 
had  been  workmen  and  few  shops  ever  worked  more  than  a 
dozen  hands.  The  early  colonists  who  came  to  America  in  some 
cases  aimed  at  a  form  of  idle  communism.  We  are  indebted  to 
Captain  John  Smith  for  the  law  laid  down  for  their  benefit: 
"he  that  will  not  work  shall  not  eat." 

Two  hundred  and  fifty  years  ago  wages  in  the  various  trades 
were  in  England  fixed  by  statute.  The  invention  of  the  steam 
engine  originated  or  greatly  stimulated  the  "  factory  system "  of 
England,  and  since  then  industrial  establishments  have  greatly 
increased  in  size.  For  many  years  England  prohibited  the 
export  of  machinery  in  the  vain  attempt  to  become  industrial 
mistress  of  the  world.  The  cotton  gin  and  water-power, 
and  later,  iron  and  steel,  made  the  United  States  an  industrial 
power  in  its  first  century.  During  this  century,  prices  and 
wages  both  increased,  and  the  workman's  standard  of  living  was 
elevated. 

The  first  " trade  union"  in  the  modern  sense  was  founded  in 
Scotland  in  1796.  Three  years  later  the  members  of  a  union 
were  tried  for  a  conspiracy  to  raise  wages.  The  year  1800 
witnessed  an  Act  of  Parliament  virtually  prohibitive  of  labor 
unions;  they  were  in  consequence  organized  secretly  and  were 
guilty  of  many  cruelly  unlawful  acts,  to  the  great  detriment  of 
trade.  The  first  crude  attempt  at  a  " Factory  Act"  for  the 
protection  of  workers  was  made  in  1802. 

The  trades  were  rapidly  organized  in  the  United  States  during 
the  first  decade  of  the  nineteenth  century.  The  English  Parlia- 
ment repealed  its  prohibitory  law  in  1824.  The  period  from 
1825  to  1850  was  one  of  communistic  or  socialistic  agitation 
everywhere.  The  first  "welfare  work"  for  employees  was  prob- 
ably that  conducted  by  Robert  Owen  at  Lanark  from  1819. 
During  this  period,  papers  and  periodicals  devoted  to  the  inter- 
ests of  labor  first  appeared,  and  the  "single  tax"  idea  came  into 
discussion. 

Among  reforms  attempted  by  the  labor  element  were  the 
abolishment  of  imprisonment  for  debt,  decrease  in  allowable 
number  of  working  hours  for  women  and  children,  increase  in 
minimum  working  age,  a  uniform  mechanic's  lien  law,  the  eight- 


INDUSTRIAL  ORGANIZATION  133 

hour  day  on  government  contracts,  the  establishment  of 
bureaus  of  labor  statistics,  the  passage  of  factory  inspection  laws, 
curtailment  of  number  of  apprentices,  abolishment  of  productive 
convict  labor,  repeal  of  oppressive  laws  relating  to  garnisheeing  of 
wages,  imposition  of  liability  for  wages  upon  stockholders  of 
corporations,  supervision  and  regulation  of  " trucking"  or 
" company  stores";  and  of  course  and  perpetually,  general 
decreases  in  hours  of  labor  and  increases  in  wages. 

With  all  of  these  reforms  excepting  possibly  those  with  regard 
to  apprenticeship,  convict  labor  and  stockholders'  liability,  many 
people  are  in  sympathy;  probably  even  many  employers,  with 
reservations  as  to  time,  place  and  opportunity.  Many  of  them 
have  been  accomplished,  to  the  great  benefit  of  the  public.  Work- 
ing hours  have  been  rightfully  decreased;  the  day's  wages  in- 
creased; yet  the  cost  of  production  cannot  have  increased  else 
the  standard  of  living  would  not  have  been  elevated.  The 
results  (on  the  basis  of  this  data)  of  labor  organization  have  been 
on  the  whole  good. 

The  present  program  of  the  labor  unions  (or  of  the  friends  of 
the  workmen)  includes: 

1.  Revision  of  our  workmen's  compensation  laws,  whereby 
the  loss  due  to  killing  or  maiming  in  industrial  service  shall  be 
distributed  over  the  industry  rather  than  concentrated  on  the 
workman  or  his  family. 

2.  An    apprehensiveness    toward    increased    production    by 
profit-sharing  systems  of  wage-payment  or  other  methods.    This 
fear  underlay  the  old  antagonism  to  machinery.     It  survives 
in  the  limitations  of  apprenticeship.     It  is  based  on  a  failure  to 
comprehend  that  all  our  wealth  is  derived  from  our  productive- 
ness, that  when  costs  are  reduced,   consumption  increases  in 
more  than  proportionate  degree,  and  that  increased  productive- 
ness ultimately  raises  the  standard  of  living. 

With  any  proposal  to  restrict  production  by  direct  or  indirect 
means,  either  generally  or  in  exceptional  cases,  we  have  no  sym- 
pathy whatever.  Such  restriction,  whether  brought  about  by 
employer  or  employee,  is  the  greatest  of  industrial  misfortunes, 
and  may  evidence  the  deepest  of  industrial  crimes. 

3.  The  closed  shop.     This  phrase  refers  to  the  shop  or  works 
in  which  union  labor  only  is  employed,  as  against  the  "open 
shop,"  in  which  both  union  and  non-union  labor  are  allowed,  and 
the  "scab  shop"  which  employs  non-union  labor  only.    We  advo- 


134  WORKS  MANAGEMENT 

cate  the  "open  shop"  as  against  either  of  the  others  because  it 
alone  aims  to  stimulate  production  by  free  competition. 

LABOR  WARFARE 

The  history  of  industrial  strife  between  employee  and  employer 
is  sickening.  An  organization  of  manufacturers  was  formed  to 
oppose  the  labor  unions  as  early  as  1832.  It  antagonized  the 
then  "ten-hour"  movement.  Strikes  were  once  considered 
indictable  as  conspiracy.  Strikes,  lockouts,  boycotts,  and 
violence  of  all  kinds  have  been  common,  often  without  indict- 
ment or  punishment  for  manifest  crime,  for  eighty  years.  Labor 
unions  have  been  united  in  great  federations  of  national  or  inter- 
national scope,  and  these  have  increased  their  already  enormous 
power  by  combinations  among  themselves,  taking  into  one 
organization  men  of  all  trades,  united  solely  by  their  common 
interests  as  union  workmen. 

As  with  international  war,  the  direct  losses  are  the  smallest. 
There  is  loss  of  wages  by  strikers  and  others,  death  and  injury 
by  violence  and  indigence,  damage  to  property,  loss  of  produc- 
tion, and  great  inconvenience  and  loss  to  the  public.  It  was 
estimated  by  "  Bradstreet's"  that  the  loss  to  the  country  by  the 
Homestead  strike  of  1892  was  not  less  than  $80,000,000.  The 
coal  strike  of  1903  for  a  time  doubled  the  cost  of  fuel  in  New  York 
City. 

A  large  proportion  of  strikes  (possibly  also  of  lockouts,  although 
this  cannot  be  stated)  are  based  on  what  may  be  regarded  as 
insufficient  grounds,  such  as  for  recognition  of  the  union,  against 
objectionable  officials  and  in  sympathy  with  other  strikers  who 
may  or  may  not  have  a  real  grievance.  A  strike  for  a  reduction 
of  hours  or  an  increase  of  wages  is  simply  one  form  of  argument, 
and  may  be  perfectly  justifiable;  yet  it  is  too  costly  and  destruc- 
tive to  be  long  tolerated  as  an  ordinary  measure  by  an  awakened 
public.  It  is  the  manager's  business  to  keep  down  costs;  it  is  not 
the  business  of  the  labor  unions  to  so  increase  production  that 
costs  may  be  kept  down  while  wages  are  simultaneously  increased. 
The  interests  of  the  two  are  dissimilar.  Like  two  rival  depart- 
ment heads,  they  need  a  common  boss  to  dictate  to  both.  And 
that  boss  is  going  to  be — the  public. 

Compulsory  arbitration  is  beginning  to  be  talked  about  even 
in  international  affairs.  It  is  certainly  worth  considering  in 


INDUSTRIAL  ORGANIZATION  135 

affairs  industrial.  Organization  of  manufacturers  to  fight  the 
labor  unions  is  not  the  way  to  finally  settle  the  labor  problem. 
The  British  Engineering  Trades  Agreement  of  1907  exemplified 
the  proper  way.  The  arbitration  plan  in  Canada  has  developed 
good  working  features.  Our  National  Civic  Federation  aims  at 
conciliation  and  reasonableness  of  discussion.  The  road  to 
industrial  supremacy  lies  through  industrial  peace. 


CHAPTER  IX 
PRINCIPLES  OF  ACCOUNTING 

The  results  of  industrial  operation  are  expressed  in  their  final 
form — in  terms  of  dollars — in  a  special  vocabulary  constituting  the 
practice  of  formal  accounting.  The  history  of  an  industrial 
enterprise  is  significantly  recorded  in  its  books  of  account. 

Ordinary  bookkeeping  is  a  highly  logical  edifice  reared  on  the 
foundation  of  a  few  arbitrary  but  simple  conventions.  Three 
rules  underly  the  whole  of  it.  With  a  thorough  grasp  of  these 
rules  and  the  application  of  a  little  common  sense,  any  man  may 
follow — may  even  in  some  cases  devise — the  plan  of  an  ordinary 
system  of  accounts.  These  rules  are: 

CD 

Make  Two  Records  of  Every  Transaction. — Every  business 
transaction  concerns  two  people  or  interests.  One  of  these 
interests  is  our  own.  Whenever  a  thing  of  value  passes  from 
"us"  to  A,  we  debit  (charge)  A  with  the  money  value  of  that 
thing,  at  the  same  time  crediting  ourselves  with  the  same  value — 
because  it  has  come  from  us.  If  the  thing  of  value  passes  from 
A  to  us,  we  debit  "us"  and  credit  A.  Whenever  a  debit  entry 
is  made,  a  precisely  equal  credit  entry  is  simultaneously  made  to 
some  other  interest  or  "account,"  and  vice  versa. 

The  total  of  debit  entries  (always  made  on  left-hand  ledger 
pages)  will  therefore  at  all  times  equal  the  total  of  credit 
entries  (on  right-hand  pages).  Double  entry  bookkeeping  is 
thus  a  simple  device  for  checking  the  correctness  of  the  accounts, 

(II) 

Subdivide  "Us"  into  the  Various  Interests  of  "Us."— If  this 
were  not  done,  the  account  or  interest  "us"  would  appear  too 
frequently  for  convenience  and  there  would  be  no  such  classifica- 
tion of  our  interests  as  is  necessary  in  order  to  show  in  what 
respects  our  business  operations  are  going  on  profitably  or 

J36 


PRINCIPLES  OF  ACCOUNTING  137 

unprofitably.  Some  of  the  interests  of  "us"  are  given  the 
artificial  titles; — 

Cash,  signifying  the  contents  of  the  cash  drawer  or  the  bank 
account; 

Merchandise,  signifying  goods  in  warehouse; 

Bills  receivable,  which  regards  "us"  in  our  aspect  as  a  creditor 
(bills  the  payment  of  which  is  receivable  by  us) ; 

Bills  payable,  having  to  do  with  our  aspect  as  a  debtor  (bills 
the  payments  on  which  are  to  be  made  by  us) . 

There  is  thus  no  account  "us."  If  we  pay  out  money  we 
credit  not  "us,"  but  cash.  If  we  receive  merchandise,  we  debit 
not  "us,"  but  mdse.  If  a  man  has  received  goods  from  us  and, 
instead  of  paying  cash,  gives  us  his  bill  or  note  for  the  amount, 
we  take  care  of  the  matter  in  this  way: 

Cr.  Mdse.}  for  the  goods; 

Dr.  John  Smith,  the  purchaser,  for  the  goods; 

Cr.  John  Smith  for  the  amount  of  his  note; 

Dr.  Bills  Receivable  (notes  receivable)  with  the  amount  of 
such  note.  Smith  has  given  us  his  note,  which  is  presumably 
good,  so  that  his  account  is  "squared."  (Note  that  the  complete 
cyclic  transaction  involves  four  entries.)  But  we  have  not 
received  any  money;  we  cannot  debit  cash.  We  therefore  create 
an  artificial  individual,  Mr.  Notes  Receivable.  We  give  the  note 
to  him,  debiting  him  with  it.  Some  day,  we  expect,  it  will  be 
paid;  when  it  is,  we  will  credit  Mr.  Notes  Receivable  and  debit 
cash.  The  account  of  the  former  will  then  balance. 

In  the  same  way,  if  we  give  a  note,  we  debit  the  person  to 
whom  we  give  the  note  and  credit  "Mr.  Bills  Payable,"  thereby 
virtually  assuming  that  that  fictitious  individual  has  paid  our 
debt  for  us.  When  we  repay  him  by  honoring  the  note  we  will 
debit  him  with  the  amount  and  credit  cash.  His  account. will 
then  balance. 

an) 

A  debit  balance  represents  either  a  resource  or  a  loss;  a  credit 
balance  represents  either  a  liability  or  a  gain.  If  the  sum  is  one 
that  we  shall  eventually  either  receive  or  pay,  it  is  correspondingly 
either  a  resource  or  a  liability;  otherwise,  it  is  either  a  loss  or  a 
gain. 

When  we  debit  an  account,  it  is  because  that  account  has 
received  something  of  value.  If  that  something  of  value  came 


138  WORKS  MANAGEMENT 

from  us,  and  the  transaction  is  closed,  no  return  being  expected 
from  the  account  in  question,  then  the  debit  represents  an 
expense,  or  loss.  For  example,  we  buy  a  broom,  crediting 
cash  for  the  money  and  debiting  office  supplies  (one  of  the  arti- 
ficial subdivisions  of  "us").  The  debit  entry  to  office  supplies 
represents  an  expense  or  loss,  because  we  never  expect  to  get 
back  that  broom  (or  anything  else  in  lieu  thereof)  as  value. 

If  the  "something  of  value"  debited  came  from  some  one  else, 
say  a  supply  of  merchandise  from  Thomas  Brown,  it  is  in  our 
possession  as  a  resource  as  long  as  it  is  a  debit.  When  the 
merchandise  stock  is  drawn  on  for  distribution,  credit  entries 
will  be  made  which  will  reduce  the  debit  balance  in  the  same 
proportion  as  our  resources  in  merchandise  are  reduced.  In  the 
case  of  the  broom,  the  debit  was  a  loss,  because  the  article  was 
immediately  consumed. 

We  credit  John  Smith  when  he  pays  us  money.  If  this  is  the 
close  of  a  transaction,  the  credit  represents  income  or  gain  from 
our  last  previous  condition.  But  if  this  money  comes  to  us  as 
a  loan  which  we  must  eventually  repay,  it  is  not  a  gain  but  a 
liability. 

It  is  easy  to  determine  whether  balances  represent  resources  or 
losses,  liabilities  or  gains,  if  we  carefully  consider  whether  or 
not  the  transaction  is  completed. 

SUMMING  UP 

At  the  close  of  a  fiscal  period  we  total  the  debit  and  credit 
entries  to  the  various  accounts,  making  a  list  of  the  balances. 
These  are  then  grouped  into  the  four  classes,  resources,  losses, 
liabilities  and  gains.  The  net  result  of  combining  losses  and 
gains  (a  debit  or  credit  balance,  as  the  case  may  be)  is  now  trans- 
ferred to  an  account  loss  and  gain.  Itemized  balances  are  wiped 
out  by  entries  "To  (or  by)  Loss  and  Gain"  and  the  correspond- 
ing centra-entries  are  made  under  Loss  and  Gain  account.  If  the 
aggregate  of  balances  is  a  credit  (gain)  then  the  aggregate  of 
closing  entries  will  be  debits  and  Loss  and  Gain  will  be  credited. 
All  accounts  (excepting  those  involving  resources  and  liabilities) 
are  now  closed  and  a  new  set  of  books  may  be  begun.  Profits 
may  then  be  divided  among  the  owners  by  debiting  Loss  and 
Gain  and  crediting  the  owners. 

The  only  accounts  carried  forward  on  the  books  to  the  next 
year  are  those  involving  resources  and  liabilities  and  the  owner's 


PRINCIPLES  OF  ACCOUNTING  139 

accounts.  A  statement  of  resources  and  liabilities  is  made  to 
show  the  condition  of  the  business;  the  loss  and  gain  account 
shows  whether  its  operation  has  been  profitable  during  the  fiscal 
period. 

BOOKS  OF  ACCOUNT 

Original  entries  of  transactions  are  made  either  in  the  cash 
book  or  the  journal.  All  cash  transactions  are  entered  consecu- 
tively in  the  former  and  the  totals  only  appear  in  the  ledger, 
which  is  the  final  record.  The  cash  book  is  virtually  a  "page 
torn  out  of  the  ledger,"  kept  separately  in  order  that  the  large 
number  of  "cash"  transactions  maybe  concentrated  and  sum- 
marized in  the  final  record. 

INVENTORY 

An  account  like  merchandise  might  at  the  end  of  the  year  show 
a  debit  balance  (loss)  were  not  consideration  given  to  the  amount 
on  hand  as  shown  by  examination  or  inventory.  Unless  we 
have  sold  merchandise  aggregating  in  value  the  cost  of  that  which 
we  have  purchased,  there  will  be  a  debit  balance.  Inventory 
shows  this  debit  balance  to  represent  something  physically  exist- 
ing; the  merchandise  transaction  is  not  closed,  so  that  the  balance 
represents  a  resource  instead  of  a  loss.  But  how  shall  we  ascer- 
tain and  show  what  the  profit  through  the  sale  of  merchandise 
has  been? 

The  method  is  thus:  Assume  that  our  purchases  of  merchan- 
dise aggregated  $4000.  One-half  of  this  stock  has  been  sold 
at  a  profit  of  $1000,  bringing  us  in  $3000.  The  merchandise 
account  now  stands  charged  with  $4000  and  credited  with  $3000, 
leaving  a  debit  against  it  of  $1000.  We  ascertain  by  inventory 
that  our  stock  of  merchandise  is  worth  (at  cost)  $2000.  On  the 
credit  side  of  the  merchandise  account  we  write, 

By  inventory    .    .    .   $2000. 
On  the  debit  side  we  write, 

Profit  on  merchandise — to  Loss  and  Gain   .    .    .   $1000. 

The  account  now  balances.  But  the  contra-entries  have  not 
been  made.  These  are,  for  the  latter,  a  credit  entry  under 
Loss  and  Gain  of  $1000;  and  for  the  former,  on  the  "merchan- 
dise" page  of  the  next  year's  ledger,  a  debit  entry  "to  inventory," 


140  WORKS  MANAGEMENT 

$2000.  This  throws  the  account  again  out  of  balance;  but  the 
debit  balance  now  represents  a  resource — stock  on  hand;  and  is 
carried  forward  as  such  during  the  next  fiscal  year. 

EXAMPLE 

We  may  sum  up  all  of  these  principles  by  considering  a  simple 
illustration.  A  and  B  engage  in  business,  each  contributing 
$2000.  The  entries  are, 

Cr.  A,  stock  account,  $2000 

Cr.  B,  stock  account,  2000 

Dr.  Cash,  $4000 

The  business  starts  with  resources  of  $4000  and  liabilities  of 
$4000.  Now  assume  the  following  transactions: 

CD 

We  buy  a  desk  of  J.  Smith  for  $50,  paying  cash. 

Cr.  Smith  by  invoice  for  desk,  $50 

Dr.  Office  Fixtures,  50 

Dr.  Smith  to  cash,  50 

Cr.  Cash,  50 

Smith's  account  balances. 

en) 

We  buy  merchandise  of  T.  Brown  for  $1000,  giving  a  note. 

Cr.   Brown  by  invoice  for  mdse.,        $1000 

Dr.  Mdse.,  $1000 

Dr.  Brown  to  note,  1000 

Cr.  Notes  Payable,  1000 

Brown's  account  balances;  our  stock  of  merchandise  is  a 
resource,  the  note  we  have  given  is  a  liability. 

(Ill) 

We  sell  $1500  worth  of  merchandise  to  A.  Green  for  $200  cash 
and  a  note  for  $1300. 

Cr.  Mdse.,  $1500 

Dr.  A.  Green  to  mdse.,  $1500 

Cr.  A.  Green  by  cash  and  note,  1500 

Dr.  Cash,  200 

Dr.  Notes  Receivable,  1300 

Green's  account  balances;  we  have  a  resource  in  the  note 
receivable  by  us. 


PRINCIPLES  OF  ACCOUNTING  141 

(IV) 

We  sell  $200  worth  of  merchandise  to  R.  Lee. 

Cr.  Mdse.,  $200 

Dr.  Lee,  $200 

Payment  has  not  been  made  by  Lee  and  his  debt  to  us  is  a 
resource. 

(V) 

We  pay  the  stenographer,  Miss  Kane,  $15 — salary  for  one  week. 
Cr.  Cash,  $15 

Dr.  Miss  Kane,  $15 

Miss  Kane's  services  virtually  balance  her  account;  the  tech- 
nical debit  balance  which  appears  is  a  loss  or  expense. 

CLOSING 

We  have  now  readied  the  end  of  the  fiscal  period.  The  fol- 
lowing accounts  are  open: 

1.  Cr.  A,  stock  account,  $2000 

2.  Cr.  B,  stock  account,  2000 

3.  Dr.  Cash,  $4135 

4.  Dr.  Office  fixtures,  50 

5.  Cr.  Mdse.,  700 

6.  Cr.  Notes  payable,  1000 

7.  Dr.  Notes  receivable,  1300 

8.  Dr.  R.  Lee,  200 

9.  Dr.  Miss  Kane,  15 

5700          5700 

Our  trial  balance  thus  checks.  We  count  the  cash  to  ascertain 
that  we  actually  have  the  $4135  that  the  books  call  for.  We 
examine  our  office  fixtures  and  merchandise  and  find  them  worth, 
respectively,  $40  and  $200. 

These  two  accounts  are  then  treated  as  follows: 

OFFICE  FIXTURES 

Dr.  to  balance,  $50 

By  depreciation,  $10 

Forward- — by  inventory,  40 

50          ~50 
Brought  forward — to  inventory,     40 


142  WORKS  MANAGEMENT 

DEPRECIATION 

To  loss  on  office  fixtures,  10 

We  now  have  two  accounts  instead  of  one;  the  debit  balance 
of  $10  to  depreciation  is  a  loss;  the  debit  balance  of  $40  to  office 
fixtures  is  a  resource  and  heads  this  account  for  the  next  year. 

MERCHANDISE 

Cr.  by  balance,  $700 

By  inventory,  200 

To  loss  and  gain,  $900 

900        ^900 
To  inventory,  200 

The  inventory  balance  of  $200  starts  the  account  for  the  next 
fiscal  period.  The  $900  has  still  to  be  entered  in  Loss  and  Gain 
account.  Remembering  this,  we  draw  off  the  balances  as  follows: 

Loss  AND  GAIN 

To  loss  on  office  fixtures  (depre- 
ciation), $10 
Merchandise,  $900 
Miss  Kane,                                          15 

25         900 

Balance,  which  may  be  dis- 
tributed to  the  owners  of 
the  business,  875 1 

1)00         900 
RESOURCES 

Cash,  $4135 

Office  fixtures,  40 

Mdse.,  200 

Notes  receivable,  1300 

R.  Lee,  200 

5875 

LIABILITIES 

Stock  accounts,  A  and  B,  $4000 

Notes  payable,  1000 

5000 

This  is  not  an  entry,  but  a  memorandum. 


PRINCIPLES  OF  ACCOUNTING  143 

The  total  debits  still  equal  the  total  credits.  The  necessary 
contra-entries  to  Loss  and  Gain  balances  will  of  course  have  been 
made  to  the  respective  accounts.  The  net  result  of  the  year's 
business  has  been  a  profit  of  $875  available  for  the  owners,  and 
an  increase  in  net  assets  which  is  also  necessarily  $875. 

SECONDARY  STATEMENT'S 

This  illustration  describes  a  mercantile  business.  Practically 
the  only  "operating  expense"  considered  was  the  $15  stenog- 
rapher's salary.  In  a  manufacturing  business,  operating  expense 
may  be  the  largest  item  of  cost,  and  this  is  often  greatly  subdi- 
vided. The  accompanying  is  an  example  of  the  sort  of  statement 
(page  144)  which  might  be  made  from  the  data  furnished  by  the 
books  of  account.  It  is  not  a  wholly  satisfactory  statement, 
because  the  inventory  adjustments  do  not  specify  the  special 
accounts  to  which  they  apply;  these  were  probably  mainly 
repairs  in  the  first  instance  and  fuel  in  the  second. 

The  data  on  which  the  bookkeeper  works  are:  invoices  from 
shippers  or  to  customers,  the  payroll,  stock  material  reports, 
department  reports,  the  collection  department's  records,  etc. 
No  unchecked  document  is  regarded  as  sufficient  evidence  for  a 
ledger  entry. 

The  financial  operations  of  a  corporation  are  usually  summed 
up  in  a  statement  which  gives 

1 .  Gross  earnings  (receipts) . 

2.  Operating  expenses,  direct  and  indirect,  including  taxes. 

3.  Net  earnings,  =  1  —  2. 

4.  Fixed  charges  (interest  on  bonds) . 

5.  Surplus  or  gross  surplus,  =3  —  4. 

6.  Dividends,  common  and  preferred. 

7.  Net  surplus,  =  5-6. 

The  net  surplus  for  any  given  year  may  of  course  be  negative 
(a  deficit) ;  dividends  or  even  bond  interest  being  paid  from  a  pre- 
viously accumulated  surplus. 

In  statements  of  resources  and  liabilities,  a  special  memoran- 
dum is  sometimes  made  of  what  are  called  "Quick  Assets"— 
those  which  are  cash  or  may  be  readily  converted  into  cash,  like 
notes  and  bills  receivable,  some  merchandise  or  material,  market- 
able securities  of  other  companies,  etc.  Land,  buildings,  machin- 
ery and  patent  rights  are  examples  of  resources  not  regarded  as 


144 


WORKS  MANAGEMENT 


quick  assets,  and  not  readily  available  for  use  in  case  of  financial 
emergency. 

NATIONAL  EXTRACTION  COMPANY 

MANUFACTURING  EXPENSE  FROM  ELEVATOR  TO  TANK 

AUGUST,  1911 


Plant 


Superintendent $  625 . 84 

Watchman 581 . 78 

Lighting ,.. .  10.93 

Mill  expense . 789 . 86 

Repairs '   7,657.90 

9,666.31 

Deduct  inventory  not  used 1,451 . 66        $8,214 . 65 

Steam 

Fuel 3,063.10 

Water  rent 162.66 

Engineers 1,298 . 16 

Firemen 609 . 99 

Handling  coal  and  ashes 202 . 97 

Engine  and  boiler  repairs 1,329 . 24 

Cylinder  and  engine  oils • 50.22 

Helpers |  380.30 

7,096 . 64 

Add  inventory  used 1,205.36          8,302.00 

Labor 

Foremen 428.44 

Pressmen 1,804.39 

Moulders 1,932.44 

Cake  strippers 1,501 . 00 

Packers 704.43 

Miscellaneous .*. 2,808.91 

Temperers 218.17 

Trimmers |  147 . 49 

Filterers [  281 . 60           9,826.87 

340,359  bushels  seed  crushed ;  26,343 . 52 

1  Bushel  average  .  0774 

Plant 0.241 

Steam 0.0244 

Labor..                                         .    0.289  .0774 


PRINCIPLES  OF  ACCOUNTING 


SELLING  EXPENSE  FROM  TANK  TO  BANK 


145 


1,937,335.06  gallons  oil  sold 

Barrelling,  net $30,659.90 

Boiling  and  refining,  net 1,925 . 89 

Discounts  arid  allowances 5,503 . 75 

Freight  and  drayage 19,118.69 

Selling  expense  (managers,  salesmen,  etc.),  net 12,120.45 

Executive  expense  (managers,  office  salaries,  etc.) .  .  14,778.74 

Interest 20,472.64 

Insurance 3,785 . 78 

Taxes 3,562 . 38 

Contingent  fund 923 .37 


Per  gallon 


112,851.59 
.0582. 


The  statement  below  shows  the  form  in  which  the  final 
reports  of  railway  companies  are  usually  made.  In  this  par- 
ticular case  (that  of  a  first-class  road)  gross  earnings  show 
a  fairly  steady  increase,  and  the  percentage  of  net  earnings  is 
high.  Maintenance  expenses  have  been  increased,  but  the  in- 
crease in  gross  earnings  has  been  in  larger  proportion.  The  trend 
of  gross  earnings  accounts  also  for  the  decreased  proportion  of 
fixed  charges.  The  freight  business  of  the  road  seems  to  have 
risen  from  a  low  ebb  in  1902.  The  " Appropriation  of  Gross 
Income"  and  the  first  two  lines  of  the  table  of  "Statistics"  are 
particularly  significant  when  comparisons  are  made  between 
different  roads. 

DELAWARE,  LACKA WANNA  AND  WESTERN  R.  R. 


Year 

Average  miles  operated 

Gross  earnings 

1896  

771 

$21  403  506 

1897   .   .   . 

771 

21  002  017 

1898  

771 

22  168  344 

1899  

771 

21  325  122 

1900 

771 

20  887  763 

1901 

771 

23  507  634 

1902  

771 

21  398  764 

1903  

770 

29  180  964 

1904 

770 

28  701  991 

1905 

770 

31  951  063 

10 


146  WORKS  MANAGEMENT 

INCOME  ACCOUNT,  YEAR  ENDING  DECEMBER  31.  1905 


Average  miles,  operated,  770 

Total 

Per  mile 

Gross  earnings  

$31,951,063 

$41  494 

Operating  expenses  

17  827,974 

23  153 

Net  earnings 

14  123  089 

18  341 

Miscellaneous  receipts 

3  938  963 

5  115 

Total  net  income  

18,062,052 

23  456 

Fixed  charges               .                            . 

6  536  137 

8  488 

Surplus  

11,525,915 

14  968 

OPERATING  EXPENSES 


Total 

Per  mile 

Maintenance  of  way 

$4  640,207 

$  6026 

Maintenance  of  equipment  

2,871,911 

3,730 

Conducting  transportation  
General  expenses 

9,816,196 
499,660 

12,748 
649 

Ratio  of  operating  expenses  to  gross  earnings,  55.8  per  cent. 
Miscellaneous  receipts  above  include  $3,295,426  net  profits  of  coal  depart- 
ment. 


APPROPRIATION  OF  GROSS  INCOME 


1905 

1904 

1903 

1902 

1901 

1900 

For     maintenance 

20.9% 

20.8% 

19.7% 

26.9% 

22.5% 

25.8% 

expenses. 
For   conducting   trans- 
portation and  general 

28.7% 

27.1% 

26.7% 

33.4% 

30.6% 

34.8% 

expenses. 
For  fixed  charges  
For  surplus 

18.2% 
32.2% 

20.9% 
31.2% 

21.7% 
31.9% 

30.4% 
9.3% 

25.0% 
21  9% 

27.5% 
11  9% 

100.0% 

100.0% 

100.0% 

100.0% 

100.0% 

100.0% 

PRINCIPLES  OF  ACCOUNTING 

STATISTICS 


147 


1905 

1904 

1903 

1902 

Ton  miles  per  mile  of  road  
Passenger  miles  per  mile  of  road 
Miles,    second    and    additional 
main  track. 
Miles  yards  and  sidings 

3,826,713 
508,363 
480 

795 

3,526,933 
477,235 
480 

756 

3,598,454 
461,509 
480 

691 

2,247,883 
410,691 
473 

696 

CHAPTER  X 
PLANT:  THE  PHYSICAL  BASIS  OF  THE  INDUSTRY 

SYSTEMS  FOR  CARRYING  ON  CONSTRUCTION  WORK 

The  planning  of  an  engineering  works  may  be  carried  on  a. 
by  the  regular  plant  staff,  strengthened  by  the  employment  of 
special  men,  6.  by  a  consulting  engineer  or  mill  architect,  c. 
by  an  engineering-contracting  force,  or  d.  by  a  firm  of  engineer- 
promoters.  The  objection  to  method  a.  arises  from  interference 
with  routine  work  and  lack  of  broad  engineering  experience,  but 
it  must  often  be  adopted  in  special  lines  of  manufacture  or  in  case 
of  extensions  to  existing  plant.  Method  6.  is  most  orthodox  of 
all  and  the  specialist  in  works  construction  is  apt  to  possess  a 
collection  of  valuable  data  unavailable  to  the  proprietor  or  his 
staff.  Method  c.  is  simple  and  attractive  but  the  proprietor's 
only  protection  against  the  diverse  interest  of  the  constructor  lies 
in  the  latter' s  reputation.  Under  the  fourth  method,  promoters 
frequently  secure  lucrative '  engineering  (and  often,  contracting) 
profits  by  advancing  money  for  construction.  The  business  is 
one  of  money-lendin'g  rather  than  of  engineering,  and  costs  are 
often  high. 

GENERAL  PRINCIPLES  OF  PLANT  LOCATION 

0 

The  layout  of  plant  has  not  been  reduced  to  anything  like  a 
scientific  basis,  but  experience  leads  to  a  few  well  defined  rules. 
Every  feature  of  construction  and  equipment,  as  well  as  of  organ- 
ization and  operation,  will  be  found  to  be  related  to  the  "  funda- 
mental ratio"  of  value  of  annual  output  to  value  of  plant.  (See 
page  8.)  The  higher  the  value  of  annual  output,  in  general, 
the  greater  will  be  the  warrantable  expenditure  in  construction. 

Cost  of  land  is  seldom  a  determining  factor  in  location,  and 
even  when  it  is  so,  this  is  frequently  not  a  matter  which  the  design- 
ing engineer  is  required  to  consider.  When  the  cost  of  material 
is  an  important  item  in  the  business,  the  proper  selection  of  a 
site  is  of  vital  importance.  Land  is  often  given  away  to  induce 

148 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     149 

manufacturers  to  locate  along  a  specific  railroad  or  in  some 
growing  town:  sometimes  a  bonus  is  paid  the  proprietor  in 
addition.  In  most  cases,  transportation  facilities  are  a  first 
consideration,  although  of  relatively  less  importance  where  a 
valuable  concentrated  product  is  made  and  the  labor  cost  is  large, 
as  in  jewelry  manufacture.  Certain  cities  or  districts  like 
Omaha,  Chicago,  Minneapolis,  St.  Paul,  Buffalo,  etc.,  are  strategic 
centers  of  transportation.  Many  plants  have  been  erected  near 
Niagara  Falls  because  cheap  power  is  there  available.  Water 
power  has  been  responsible  for  the  development  of  many  Eastern 
cities.  Fuel  supply  is  of  first  importance  in  some  industries,  and 
this  factor  is  responsible  for  much  of  the  growth  of  Pittsburg. 
Certain  industries  depend  upon  an  ample  or  special  supply  of 
water;  a  paper  and  pulp  mill,  for  example,  must  usually  be  located 
on  an  unpolluted  stream.  Where  bulky  raw  materials  must  be 
imported,  a  seaboard  location  may  be  necessary.  Pure  air  must 
be  sought  in  some  industries. 

A  frequently  preferred  location  is  in  the  suburbs  of  a  large  city, 
where  a  five  cent  carfare  brings  an  abundant  labor  supply  within 
reach.  The  quality  of  this  labor  may  be  inferior,  and  the  induce- 
ments of  the  city  are  apt  to  make  workmen  somewhat  unsteady. 
There  are  well  recognized  centers  of  supply  of  men  for  various 
trades,  as  Paterson,  N.  J.,  for  silk  workers,  Minneapolis  for  millers, 
Southeastern  New  England  for  boot  and  shoe  operatives,  etc. 
An  isolated  location,  involving  the  establishment  of  a  new  indus- 
trial community,  is  often  chosen  for  large  works.  Here  the  work- 
man's cost  of  living  may  be  kept  low  by  " betterment"  enter- 
prises, which,  although  involving  additional  investment,  may  be 
made  self-supporting.  The  time  spent  in  construction  must  be 
actively  devoted  to  a  canvass  for  men;  but  when  men  are  secured 
they  are  apt  to  remain  quite  permanently. 

An  urban  or  a  suburban  location  has  the  advantages  of  munici- 
pal fire  and  police  protection,  water  supply,  sewerage  system, 
and  lower  fire  insurance  rates;  and  the  disadvantages  arising  from 
higher  taxes,  municipal  ordinances  regarding  smoke  abatement, 
etc.  The  avoidance  of  undesirable  neighbors,  present  or  future, 
is  a  factor  to  be  weighed. 

The  general  location  being  determined,  the  means  for  ingress 
and  egress  must  be  considered,  llail  communication  is  preferred 
to  water  for  nearly  all  purposes,  the  latter  often  being  inoperative 
for  part  of  the  yearv/  Safe  approaches  for  employees  must  be 


150  WORKS  MANAGEMENT 

conserved,  and  no  peculiarity  of  construction  should  be  contem- 
plated which  might  cut  off  the  plant  from  a  fire  engine. 

DESIRABLE  CHARACTERISTICS  OF  SITE 

A  level  plot  is  usually  the  ideal,  although  for  some  purposes  a 
sloping  hillside  makes  gravity  conveying  economical.  The 
direction  of  prevailing  winds  should  be  dwelt  upon  in  the  plan- 
ning if  comfort  and  high  production  are  to  be  attained  in  hot 
weather.  A  well-drained  soil  is  of  advantage  and  facilitates 
trucking  during  construction.  Soils  differ  widely  in  bearing  power 
and  cost  for  excavation,  both  of  which  factors  seriously  influence 
the  initial  expense  for  foundations.  Low  undrained  spots  are  not 
necessarily  objectionable,  as  they  may  provide  a  place  for  the 
disposal  of  waste. 

The  entire  planning  should  be  for  an  ultimate  plant,  even  if 
a  dozen  times  the  size  of  that  to  be  immediately  constructed,  and 
land  purchases  should  be  made  on  this  basis.  Land  for  enlarge- 
ments is  often  held  by  abutters  at  prohibitive  prices  after  a  plant 
is  once  established.  It  is  desirable  at  the  start  to  purchase  an 
ample  tract  or  at  least  to  secure  long-term  options  on  adjoining 
land  not  immediately  needed.  The  size  of  plot  necessary  depends 
upon  its  shape.  The  importance  of  securing  sufficient  yard  room 
for  storage  and  various  operations  is  often  not  fully  realized.  But 
while  a  purchase  once  decided  on  should  be  made  liberally,  the 
buying  (and  the  construction  as  well)  should  not  be  carried  on 
too  hastily.  Large  savings  in  fixed  costs  may  result  from  defer- 
ring expenditures  until  the  opportune  time. 

PRELIMINARY  PLANNING 

Even  though  the  proprietor  may  have  ideas  apparently  definite 
regarding  the  space  to  be  provided  for  his  plant  (a  condition 
most  likely  to  exist  when  the  new  works  is  an  extension  or  dupli- 
cation of  one  already  existing) ,  the  mill  engineer  should  make  it 
one  of  his  first  duties  to  critically  examine  this  subject.  If  in 
active  practice  in  this  field,  he  will  gradually  accumulate  a  mass 
of  statistics  as  to  relation  between  floor  area  and  output  for 
various  processes.  These  data  never  become  complete  nor  are 
they  ever  sufficiently  detailed.  If  they  are  based  on  reading 
rather  than  on  original  experience,  they  must  be  employed  with 
especial  caution,  since  differences  in  management,  etc.,  may, 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     151 

even  in  plants  working  on  the  same  products  with  the  same 
machines,  lead  to  decidedly  different  rates  of  output.  For 
example,  a  shop  in  which  day  work  was  the  rule  might  give  only 
half  the  tonnage  per  unit  of  space  that  would  be  obtained  where 
a  scientific  profit-sharing  system  of  paying  workmen  was  in 
operation. 

Comparisons,  when  made,  should  be  based  on  some  adequate 
unit  of  output;  generally,  the  tonnage.  Where  the  output  is 
diversified,  but  a  single  principal  raw  material  is  used,  its  tonnage 
may  be  the  unit.  In  comparing  locomotive  works,  statements 
of  floor  space  should  be  related  to  tonnage  rather  than  number  of 
locomotives  built;  so  also,  of  course,  with  shipyards.  Tonnage 
is  the  unit  for  a  paper  or  pulp  mill,  but  a  ground-wood-pulp  mill 
may  not  be  compared  with  a  soda-process  plant.  In  a  linseed 
oil  works,  the  consumption  of  flaxseed  is  the  unit;  in  a  locomo- 
tive repair  shop,  the  number  of  pits  is  a  crude  but  sufficient 
unit;  in  a  saw  and  planing  mill,  the  feet  of  product  will  answer 
for  comparing  plants  working  on  similar  grades;  foundries  mak- 
ing similar  products  of  like  materials  may  be  compared  on  a 
tonnage  basis,  but  a  malleable  iron  pipe  fittings  plant  should 
not  be  grouped  with  one  making  water  pipe. 

Marked  aberrations  and  inconsistencies  will  be  found  in  all 
such  comparisons.  These  are  due  to  a  variety  of  causes,  and  are 
perhaps  most  noticeable  in  connection  with  storage  and  assembly 
departments.  Nevertheless,  after  all  discounting,  properly 
analyzed  space  data  is  almost  invaluable  for  approximate  esti- 
mates; even  drafting  room  and  office  space  will  be  found,  for  each 
manufacturing  process,  to  have  some  fairly  well  established 
normal  ratio  to  output. 

As  many  sets  of  figures  should  be  compared  as  it  is  possible  to 
obtain,  average  ratios  of  departmental  space  to  output  ascer- 
tained, and  any  extreme  variations  from  average  ratios  separately 
investigated.  These  variations  will  usually  be  found  to  be  due 
either  to  (a)  special  modifications  of  process  or  (b)  errors  in  data. 
For  example,  one  comparison  showed  a  boiler  shop  to  have  an 
area  of  4100  sq.  ft.  per  unit  of  output,  while  the  average  of  nine 
other  shops  making  similar  types  of  boiler  was  3000  sq.  ft.  In- 
vestigation showed  that  the  exceptional  plant  was  making  a 
large  number  of  small  boilers  and  also  doing  an  excessive  amount 
of  hand  riveting,  both  necessitating  extra  space.  In  another 
instance,  a  preliminary  comparison  of  six  engineering  works 


152  WORKS  MANAGEMENT 

making  the  same  product  indicated  that  one  was  using  about 
half  the  foundry  space  per  unit  of  final  output  that  the  others 
were  employing.  The  statistician  afterward  recollected  that  the 
first  plant  purchased  the  larger  proportion  of  its  castings. 

Besides  ratios  of  space  to  output,  there  are  other  canons  for 
determination  of  plant  area.  In  certain  industries  (not  usually 
those  where  heavy  machinery  is  used)  the  space  necessary 
depends  quite  directly  on  the  number  of  workmen.  In  others, 
as  in  forge  shops,  a  man  and  a  machine  form  a  unit  from  which 
both  output  and  space  may  be  determined.  (We  are  not  now 
concerned  with  space  from  the  hygienic  point  of  view,  but  simply 
as  related  to  the  man's  needs  as  an  element  of  the  mechanism). 
Certain  kinds  of  plants  (e.g.,  spinning  mills),  use  machinery  so 
thoroughly  standardized  that  the  floor  area  necessary  for  a  given 
output  is  known  with  mathematical  accuracy.  The  engineer 
needs  simply  to  learn  the  dimensions  and  attachments  of  each 
machine.  In  other  works,  as  in  locomotive  erecting  shops,  or  the 
machine  room  of  a  paper  mill,  the  machinery  or  product  is  so 
special  that  the  plant  must  virtually  be  designed  to  contain  it 
and  no  collection  of  general  comparative  data  is  needed. 

In  large,  complex  plants,  particularly  if  some  new  variation  in 
method  or  process  is  to  be  introduced,  it  will  sometimes  be  found 
that  no  opportunity  for  bulk  comparison  exists.  The  plant  must 
then  be  divided  into  elements  and  these  elements  separately 
considered  in  the  light  of  data  on  like  elements  in  various  plants. 
Any  uncertainty  will  then  be  reduced  to  apply  to  one  or  a  few 
only  of  these  elements.  A  paper  mill,  making  its  own  lime  and 
soda-process  pulp,  was  to  be  located  at  a  point  where  the  bulk  of 
the  wood  supply  was  of  an  extremely  resinous  nature,  nowhere 
else  regarded  as  fit  for  making  pulp.  Special  arrangements  had 
to  be  made  to  treat  it.  This  special  equipment  having  been 
decided  upon,  that  particular  department,  and  the  lime-burning 
department,  were  designed  to  suit.  All  other  departments  were 
planned  as  usual;  the  screen,  bleach,  beater  and  other  buildings 
were  given  such  floor  space  as  is  usual  for  those  operations  in 
other  plants  making  the  same  sort  of  paper  with  a  corresponding 
mixture  of  fibers. 

In  these  estimates  and  outlines,  all  figures  should  be  drawn  off 
for  the  proposed  ultimate  size  of  plant.  There  is  no  other  proper 
way  of  "providing  for  extensions."  The  proprietor  should  fix 
the  size  of  the  final  plant,  the  engineer  should  plan  it,  and  the 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     153 


two  should  trim  it  down  to  the  dimensions  authorized  for  imme- 
diate construction. 

Specific  conditions  may  sometimes  warrant  radical  departures 
from  normal  space  ratios:  the  introduction  of  an  improved 
machine;  excessive  cost  of  land,  which  may  suggest  unusual 
concentration  by  high-storied  buildings;  commercial  factors 
indicating  the  advisability  of  providing  excessive  space;  the 
purchase  of  outside  power,  making  power  plant  and  coal  storage 
space  unnecessary;  division  of  the  property  as  by  street  or  stream, 
making  normal  arrangement  impossible,  and  many  others.  The 
necessary  provision  for  yard  room  is  particularly  dependent  upon 
such  factors.  The  amount  of  space  needed  for  the  temporary 
(and  also  for  the  more  or  less  permanent)  storage  of  raw  materials 
as  received,  in  proper  proximity  both  to  receiving  route  and  point 
of  consumption;  of  work  in  process;  and  of  finished  work;  will 
vary  notably  with  the  activity  of  the  industry,  its  steadiness  or 
intermittence,  the  amount  of  capital  invested,  the  occurrence  of 
seasonal  shut-downs,  etc. 

BUILDING  STANDARDS 

Practically  all  mill  buildings  are  in  plan  rectangles  or  groups  of 
adjoining  rectangles.  A  trapezoidal  form  means  more  expense 
in  proportion  to  the  floor  space,  and  in  many  plants  would  be  of 
absolutely  no  more  value  than  the  inscribed  rectangle,  since  a 
crane  could  not  reach  the  extended  corner.  Shapes  of  greater 
irregularity  are  still  worse. 

The  types  of  building  used  in  large  plants  are  three:  the  build- 
ing of  one  high  story,  that  of  several  stories  of  nearly  equal  height, 
and  that  of  a  single  low  story.  The  first  type  usually  appears  in 
one  of  the  following  forms: 


(1) 


J2L 


(4) 


(5) 


The   dotted   lines   represent   optional   longitudinal   monitors 
with  louvres  or  skylights.     Crosswise  monitors,  or  flat  skylights, 


154  WORKS  MANAGEMENT 

either  longitudinal  or  transverse,  may  be  used  alternately  or  con- 
jointly. This  type  of  building  is  used  only  on  large  work,  and 
its  width  is  seldom  less  than  75  ft.  The  side  spans  in  2  and  3  may 
be  single  story,  as  in  2,  or  provided  with  gallery  floors  as  in  3,  on 
which  light  machinery  only  is  used.  The  side  span  is  not  parti- 
tioned off  from  the  main  span  at  a  and  b,  as  that  would  obstruct 
the  lighting  of  the  latter.  A  high  building  of  this  type  may 
usually  be  lighted  from  side  windows  if  the  width  does  not  exceed 
100  feet,  but  ordinarily  some  one  of  the  forms  of  overhead  light 
is  provided  for  widths  above  75  ft.  unless  the  building  is 
exceptionally  high. 

The  one-story  low  building  is  used  (a)  for  small  work  where  land 
is  cheap  and  separation  of  departments  advisable,  and  (b)  where 
unusually  good  light  is  necessary  in  all  departments.  In  the 
latter  case,  the  building  must  be  narrow  if  side  light  is  depended 
upon,  but  the  best  lighting  effect  is  obtained  by  the  use  of  the  saw- 
tooth roof,  with  which  there  is  no  limit  to  the  width  of  a  building 
which  can  be  adequately  lighted.  Ordinary  low  buildings 
may  have  a  singly-sloped  shed  roof,  or  such  a  roof  as  that  in 
Fig.  1,  without  the  monitor. 

There  are  arguments  in  favor  of  a  building  of  several  stories, 
where  it  can  be  employed.  It  economizes  land,  of  course,  but 
it  decreases  the  cost  of  floor  space  as  well.  A  five-story  building 
occupying  a  given  ground  space  requires  somewhat  more  founda- 
tion (but  only  slightly  more  excavation  and  form  work)  and  no 
more  roof  than  one  of  a  single  story  on  the  same  space.  For 
very  heavy  floor  loads,  the  many-storied  building  is,  however, 
impracticable.  Light  machinery  only  may  be  used  on  upper 
floors;  and  unless  the  upper  stories  are  abnormally  high,  standard 
traveling  cranes  cannot  be  employed.  The  whole  problem  of 
transportation  and  communication  becomes  complicated  with 
storied  construction. 

The  necessary  floor  area  and  type  of  building  having  been 
determined,  the  width  is  next  considered.  In  low  buildings 
without  top  light,  or  buildings  of  more  than  one  story,  adequate 
lighting  is  usually  impossible  if  the  width  exceeds  60  ft.  The 
uppermost  floor  of  a  storied  building  may,  of  course,  have  top 
light  from  saw-tooth  skylights  or  otherwise.  The  single  story 
high  building  may  be  of  any  width,  unless  the  height  is  beyond 
any  normal  amount — say  in  the  riveting  tower  of  a  boiler  shop. 
The  determination  of  the  desirable  width  depends  largely  on  the 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     155 

crane  service  and  on  the  sizes  of  materials  and  products  to  be 
handled.  Overhead  electric  traveling  cranes  have  been  roughly 
standardized  in  spans  of  about  40,  55  and  70  ft.  and  it  is  usual  in 
large  works  to  accept  these  by  adopting  corresponding  building 
spans.  Those  of  50  and  75  ft.  should  be  sufficient  for  all  the 
important  buildings  of  an  engineering  plant.  By  combining 
these,  widths  of  50,  75,  100,  125,  150,  175  and  200  ft.  may  be 
obtained.  A  wider  single  span  than  75  ft.  is  usually  considered 
undesirable  where  traveling  cranes  are  to  be  used. 

The  length  of  the  building  will  suit  the  required  area  and 
determined  width  as  closely  as  is  compatible  with  the  use  of  a 
standard  "  bay  "  (distance  longitudinally  from  center  to  center  of 
column),  adopting  preferably,  for  the  latter,  an  even  number 
of-  feet  somewhere  between  12  and  20,  to  suit  standard  material. 
A  20  ft.  bay  is  common  in  large  steel  construction  buildings. 
There  are  objections  from  an  insurance  standpoint  to  the  con- 
struction of  single  buildings  covering  more  than  40,000  sq.  ft. 
of  ground  space. 

Heights  depend  upon  necessary  crane  clearances,  the  method  of 
transmitting  power,  the  nature  of  the  work,  and  lighting  re- 
quirements. In  storied  buildings  without  standard  cranes,  the 
floor  heights  will  usually  range  from  10  to  18  ft.  If  a  line  of 
shafting  runs  along  a  side  wall,  10  ft.  would  be  insufficient.  A 
locomotive  erecting  shop  needs  (a)  15  ft.  of  room  above  the  floor 
for  the  locomotive  itself,  (b)  room  for  a  crane,  including  overhead 
clearance  and  (c)  sufficient  additional  height  for  an  economically 
designed  roof  truss. 

PROCESS  MAPPING 

The  arrangement  of  buildings  must  suit  the  process  of  manu- 
facture, and  it  is  often  recommended  that  the  process  be  mapped 
out  and  the  buildings  placed  on  the  map  to  fit  in  proper  points 
along  the  straight  or  curved  process  lines.  This  sounds  attractively 
logical,  but  would  sometimes  lead  to  practical  difficulties.  Much 
depends  upon  (a)  the  value  of  materials  at  various  stages  of  com- 
pletion and  (b)  their  nature,  as  fixing  appropriate  methods  for 
handling  them.  In  a  cottonseed-oil  mill,  for  example,  the  seed- 
grinding  must  precede  expression  of  the  oil,  while  refining  must  fol- 
low the  latter :  but  so  far  as  building  arrangement  is  concerned,  there 
is  absolutely  no  reason  why  the  refinery  may  not  be  on  the  opposite 


156  WORKS  MANAGEMENT 

side  of  the  seed  house  from  the  press  room,  for  oil  can  be  handled 
at  an  insignificant  cost  by  pumping.  Again,  the  questions  of 
freight  and  market  are  often  such  that  the  refinery  may  be 
hundreds  of  miles  distant  from  the  rest  of  the  plant.  If  the 
plant  is  one  in  which  small  parts  are  made  in  large  quantities 
(particularly  if  the  value  of  these  parts  is  high),  the  question  of 
arrangement  (or  even  of  shape)  of  buildings  is  of  relatively 
small  importance. 

Much  depends  upon  the  quantitative  relation  between  depart- 
ments. A  foundry  is,  of  course,  a  feeder  to  the  machine  shop,  and  is 
fed  by  the  pattern  shop.  To  what  extent  each  of  these  depart- 
ments feeds  another  is  to  be  determined  by  the  value  of  the 
commodity  fed.  If  the  foundry  is  making  a  line  of  heavy 
repetitional  castings,  worth  not  much  over  a  cent  a  pound,  such 
a  product  can  stand  very  little  expense  for  handling,  and  the 
machine  shop  must  be  close  to  the  foundry.  If  a  pattern  shop 
is  making  complicated,  expensive  patterns,  which  may  easily 
be  worth  $1.00  per  pound,  the  expense  of  handling  is  a  small 
matter,  and  there  is  no  need  whatever  to  locate  the  pattern 
shop  close  to  the  foundry. 

There  is  no  way  of  handling  cheap  miscellaneous  castings  auto- 
matically. They  must  be  lifted  in  and  out  of  trucks  or  cars  and 
conveyed  in  lots  from  one  place  to  another.  It  is  almost  univer- 
sal, therefore,  for  each  machine  works  to  have  its  own  foundry, 
and  to  locate  the  foundry  close  to  the  machining  department. 
By  " closeness"  is  not  meant,  necessarily,  adjacence;  but  close- 
ness with  reference  to  the  method  of  handling.  If  castings  are 
to  be  loaded  on  flat  cars  by  a  traveling  crane,  and  then  pushed  by 
a  locomotive  to  the  machine  shop,  to  be  similarly  unloaded  in 
that  department,  it  makes  little  difference  whether  the  locomo- 
tive pushes  the  flat  car  100  ft.  or  1/2  mile.  Either  distance  is 
"  close,"  considering  the  means  of  transport.  If  the  flat  car  is  a 
light  push  car,  to  be  manually  handled,  a  half  mile  distance  would 
not  be  "  close."  When  very  cheap  materials  (sand,  for  example) 
must  be  handled  at  all,  they  must  be  handled  with  extreme  cheap- 
ness on  account  of  their  own  low  value.  It  is  essential,  then,  to 
store  them  close  to  the  department  in  which  they  are  used.  The 
labor  for  handling  them  may  even  then  cost  more  than  the  mate- 
rials themselves,  yet  there  is  no  standard  and  accepted  method  of 
conveying  these  cheap  materials,  on  account  of  the  high  cost  of 
all  conveying  appliances  as  compared  with  that  of  the  material. 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     157 

Some  cheap  materials  are,  however,  from  their  physical  nature  so 
cheaply  handled  that  location  has  little  to  do  with  the  scheme  of 
the  process.  Crude  oil  is  an  example.  This  has  a  value,  even  at 
seaboard,  of  about  1/2  cent  per  pound.  Yet  two  closely  asso- 
ciated steps  of  the  process  of  preparation  for  the  market  are  often 
conducted  at  a  distance  of  hundreds  of  miles  from  each  other, 
since  liquids  can  be  readily  and  cheaply  handled  by  means  of  a 
pump  and  pipe  line. 

Again,  the  physical  nature  of  certain  materials  makes  them 
practically  non-transportable.  The  departments  of  a  steam 
power  plant  cannot  be  separated  beyond  certain  quite  narrow 
limits,  since  steam  is  subject  to  condensation  in  transmission. 
Water  is  subject  to  no  similar  phenomenon,  and  we  sometimes 
find,  therefore,  boiler  feed  pumps  located  a  quarter  of  a  mile 
from  the  boilers  which  they  supply,  although  no  process  relation 
could  be  logically  more  intimate  than  that  which  exists  between 
a  boiler  and  its  feeder.  Electric  power  may  be  transmitted  100 
miles;  and  it  is  not  at  all  unusual  to  generate  power  in  one  city, 
and  apply  it  to  a  shaft  in  another,  many  miles  away. 

Paper  is  a  rather  expensive  commodity,  readily  transportable, 
while  wood  is  cheap  and  expensive  to  handle.  We  consequently 
find  wood-pulp  paper  mills  always  located  near  the  source  of 
wood  supply  rather  than  near  the  market.  Pulp  is  cheaper  than 
paper,  but  still  not  one  of  the  class  of  "  cheap"  commodities.  It 
is  easily  and  cheaply  transported.  We  sometimes  find,  therefore, 
the  pulp-making  and  paper-making  departments  separated — 
perhaps  a  hundred  miles  or  more — although  logically  the  two 
should  be  together. 

The  importance  of  the  relation  between  commodity  cost  and 
cost  of  transportation  is  evident  even  in  the  complexity  of  railway 
rates,  in  which  there  is  an  underlying  principle  that  cheap  mate- 
rials take  low  freight  rates.  The  general  relation  between  the 
two  brings  us  back  to  the  fundamental  relation  between  value  of 
product  and  first  cost  of  transporting  plant.  When  this  ratio 
is  high,  transportation  cost  ceases  to  be  a  determining  factor  in 
the  arrangement  of  departments,  and  buildings  may  be  grouped 
without  reference  to  their  logical  sequence  in  the  process.  When 
the  ratio  is  low,  transportation  is  an  important  element,  and  re- 
lated departments  must  be  physically  related. 

Some  ores,  for  example,  are  of  very  low  value,  and  will  not 
stand  much  transportation  expense.  To  build  a  smelter  at  the 


158 


WORKS  MANAGEMENT   , 


mine  is  often  open  to  serious  objection.  Mining  is  usually  done 
in  several  separated  districts,  the  combined  product  of  which 
supplies  a  single  smelter.  The  latter  could  not  be  strategically 
located  with  respect  to  all.  To  locate  the  smelter  with  respect 
to  any  one  mine  might  remove  it  far  from  the  supply  of  fuel,  labor 
and  other  materials.  The  problem  is  solved  by  building  "con- 
centrators" at  the  mines.  These  condense  the  ore  to  a  product 
which  has  a  sufficiently  high  value  to  stand  the  cost  of  transpor- 
tation, and  the  various  "  concentrates "  are  then  hauled  to  a 
smelter,  perhaps  a  hundred  miles  distant,  for  final  treatment. 
The  smelter  is  then  located  strategically  with  reference  to  its 
necessities  as  a  manufacturing  plant.  A  similar  line  of  argument 
justifies  the  frequent  separation  of  pulp  and  paper  mills;  in  this 
case,  however,  the  ultimate  final  product  is  often  less  valuable 
than  that  of  the  smelter,  and  the  question  of  proximity  to  the 
market  for  that  final  product  is  an  additional  determining  factor. 
The  actual  rate  of  freight  is  often  not  the  determining  element 
in  the  cost  of  transportation  by  rail.  Oil  may  be  shipped  either 
in  bulk  or  in  barrels,  for  example.  Even  at  the  same  rate  of 
freight,  the  dead  weight  of  the  barrel  may  result  in  a  loss  of  20  to 
25  per  cent,  in  transportation  cost.  Many  oil  producers  and 
refiners  therefore  manufacture  their  product  at  some  properly 
located  point,  and  then  ship  it  in  bulk  to  their  own  tank  stations 
in  some  distant  city,  where  it  is  barreled  in  locally  purchased 
barrels  as  required  by  local  trade.  Here  a  disorganization  into 
two  entirely  separate  establishments  is  found  profitable.  One 
of  these,  from  a  strictly  logical  standpoint,  is  unnecessary.  Strict 
logical  analysis  evidently  does  not  apply. 


GROUPING  OF  BUILDINGS 

A  strict  process  grouping  of  the  simplest  sort  leads  to  a  single 
rectangular  building,  or  a  group  of  such  buildings  arranged  in  a 
line,  which  may  be  either  straight,  or  part  of  the  periphery  of  a 
polygon. 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     159 

It  is  far  more  common  to  find  several  distinct  processes  carried 
along  at  once,  all  culminating  at  a  single  assembly  department. 
This  provides  groups  or  trains  of  buildings  leading  to  a  central 
erecting  shop  as  in  a  locomotive  works. 


When  buildings  of  determined  size  are  thus  grouped  on  the 
drawing  board,  it  should  be  remembered  that  a  unit  division  of 
yard  space  may  often  need  to  be  planned  for  with  the  same 
fixedness  of  dimensions  as  a  building.  This  is  especially  true 
when  such  parts  of  the  yard  space  are  to  be  commanded  by  cranes. 
One  should  consider  the  whole  matter  of  storage  requirements  in 
a  comprehensive  way,  note  whether  storage  must  be  outside  or 
inside,  and  treat  both  classes  of  space  just  as  he  would  buildings 
in  working  up  a  tentative  plan. 

A  structural  steel  fabricating  plant  perhaps  best  exemplifies 
the  process  type.  Here  there  is  one  practically  unmodified 
current  from  office,  drafting-room,  template  shop,  shears,  planers 
and  riveters,  to  the  outbound  storage  yard.  In  a  locomotive 
works,  a  series  of  processes — foundry  and  forge — leads  to  the 
erecting  floor,  usually  by  way  of  the  machine  shop. 

In  engineering  shops,  there  are  two  distinctive  methods  of 
management  which  powerfully  influence  grouping.  In  the  first, 
separation  is  by  parts;  in  the  second,  by  function.  In  the  first, 
all  parts  which  enter  into  the  construction  say  of  a  boiler  feed 
pump,  are  machined  in  one  shop,  whether  they  are  composed  of 
steel,  cast  iron,  or  brass.  In  the  second,  all  brass  parts  requiring 
lathe  work  only  are  machined  in  one  shop,  whether  destined  to 
form  part  of  a  boiler  feed  pump  or  of  a  locomotive.  The  idea  of 
a  "process"  is  not  the  same  for  the  two  types  of  shop. 

At  the  outset,  it  should  be  ascertained  whether  any  necessity 
exists  that  two  or  more  particular  departments  be  adjacent;  and 
it  should  also  be  determined  what  departments  must  be  on  ground 
floors. 

Certain  principles  of  insurance  engineering  must  be  considered. 
The  limit  of  area  that  is  allowable  under  one  roof  suggests  the 


160  WORKS  MANAGEMENT 

question  of  space  between  buildings.  Such  spaces  should  be 
ample;  in  general,  not  less  than  50  ft.  for  main  structures.  De- 
partments where  fires  are  likely  to  start,  like  forge  shop,  foundry, 
paint  and  wood-working  shop,  should  be  separated  from  all  the 
rest  of  the  property,  with  wide  intervening  spaces.  Similar 
separation  should  be  provided  for  storehouses  and  other  build- 
ings in  which  the  contents  may  be  of  exceptionally  high  value. 
Intervening  spaces  endwise  should  be  multiples  of  the  bay 
spacing;  those  sidewise  may  well  correspond  with  building  spans 
where  no  special  reason  exsits  for  the  contrary.  In  this  way  a 
very  few  crane  spans  will  answer  for  both  outdoor  and  indoor 
cranes  and  greater  interchangeability  of  handling  devices  will  be 
possible. 

TRANSPORTATION  QUESTIONS  IN  GROUPING 

An  outside  crane  runway  will  be  far  less  expensive  if  supported 
on  one  or  both  sides  against  a  building  wall;  otherwise,  expensive 
A-frame  columns  or  diagonal  stiffening  will  be  necessary. 

A  transfer  table  is  a  traveling  crane  without  hoist  or  trolley, 
moving  in  a  pit  so  that  its  upper  surface  is  flush  with  the  ground. 
It  is  used  for  moving  very  heavy  loads,  which  are  pushed  on  and 
off  the  crane  bridge  while  the  latter  is  stationary.  Unlike  an 
overhead  traveling  crane,  a  transfer  table  "kills"  the  ground 
space  which  it  occupies,  which  then  becomes  an  absolute  loss  of 
available  room,  and  even  a  blockade  to  communication  between 
departments.  Its  use  is  to  be  avoided  where  land  is  of  high 
value.  It  does  nothing  that  cannot  be  done  by  an  overhead 
traveling  crane,  but  the  latter  is  neither  as  safe  nor  as  cheap. 

For  light  materials,  if  the  floors  are  good,  much  inside  trans- 
portation may  be  provided  for  by  two  or  four  wheeled  trucks. 
If  provided  with  a  swivelling  front  axle,  these  will  turn  sharp 
corners.  They  should  have  ball  bearings  in  all  wheels.  In 
restricted  areas,  the  jib  crane  may  be  used  both  as  a  prime  con- 
veyor and  as  an  auxiliary  to  other  devices.  The  traveling  jib 
has  greater  scope;  instead  of  swinging  on  a  fixed  foundation,  it  is 
movable  along  a  rail,  the  top  of  its  post  being  guided.  The  mono- 
rail traveling  hoist  is  widely  applicable  for  long  hauls  as  well  as 
for  general  distribution.  Main  buildings  will  have  standard 
overhead  electric  traveling  cranes,  sometimes  several  on  one 
runway;  or  where  the  work  is  unusually  heavy,  more  than  a  single 
runway  may  be  provided. 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     161 

Quick  intercommunication  between  departments  in  the  same 
or  adjacent  buildings  is  in  general  best  secured  by  means  of 
industrial  narrow-gage  railways.  These  use  a  very  light  rail 
section,  and  the  cars  employed  are  of  short  wheel  base,  to  permit 
of  sharp  curves.  Electric  storage  battery,  or  trolley,  compressed 
air  or  even  gasolene  motor  cars  may  be  used,  if  any  saving  is 
probable  thereby  in  labor  expense  or  in  time.  Tracks  must  be 
laid  out  with  ample  clearances  around  columns,  machines  and 
the  like,  and  every  effort  should  be  made  to  avoid  grades.  A 
level  track  is  the  only  safe  track.  Short  turntables  are  frequently 
employed  in  lieu  of  curves,  which  cut  out  much  more  valuable 
floor  area  than  the  turntable.  Unless  carefully  designed,  these 
tables  will  cause  trouble. 

Gravity  conveying — hoisting  all  materials  to  top  floors  and 
then  lowering  them  down  from  floor  to  floor  until  the  finished 
product  appears  at  the  ground  level — is  of  limited  application, 
but  should  always  be  considered. 

Clearances  for  standard  railway  tracks  should  be  perferably  12 
ft.  in  width  and  15  ft.  in  height.  The  latter  distance  will  clear  a 
locomotive,  but  not  a  man  on  top  of  a  box  car.  Unless  22ft.  of  head 
clearance  exists,  bridge  guards  should  be  used.  Track  curves  for 
yard  service  with  six  wheeled  switch  locomotives  would  best  be 
made  of  not  less  than  300  ft.  radius.  The  standard  track  gage  of 
4  ft.  81/2  in.  is  measured  from  inside  to  inside  of  rail  head.  (Crane 
track  gages  are  measured  center  to  center  of  rails.)  When  tracks 
run  alongside  of  buildings,  there  is  always  more  or  less  intercep- 
tion of  light.  This  is  of  little  consequence  on  "running  tracks/' 
but  is  often  a  serious  matter  if  these  tracks  are  used  for  storage 
of  cars  or  are  so  related  to  the  trackage  system  that  trains  are  apt 
to  be  stalled  thereon.  In  large  works,  a  main  siding  should  be 
installed,  usually  parallel  with  the  railroad  line.  This  gives  room 
for  the  receipt  of  materials  without  imposing  the  necessity  for 
immediately  shunting  them  to  their  ultimate  destination.  A 
main  shipping  track  is  also  desirable,  being  equivalent  to  just 
that  much  additional  storage  space  for  finished  products,  and 
permitting  of  a  higher  "load  factor"  in  the  shipping  department. 
Connections  with  the  railroad  at  both  ends  of  main  siding  and 
shipping  tracks  eliminate  much  of  the  risk  of  congestion  and 
delay.  Track  crossings  are  to  be  avoided,  and  should  be  unneces- 
sary in  any  well  arranged  plot.  Where  crossings,  drawbridges, 
etc.,  exist,  as  in  many  present  plants,  automatic  signals  may 
11 


162     «  WORKS  MANAGEMENT 

become  necessary.  These  may  be  electrically  or  mechanically 
operated,  the  switches  and  signals,  of  course,  interlocking. 
Tracks  should  not  run  into  buildings  on  a  curve.  At  least  100 
ft.  of  straight  track  should  be  provided  before  reaching  the 
building. 

Locomotives  for  yard  trackage  may  be  either  four-wheeled  or 
six-wheeled  switchers,  the  latter  being  usually  much  larger  and 
heavier  engines.  (The  small  locomotives  built  for  narrow  gage 
industrial  tracks,  common  in  foundries,  are  usually  four-wheeled.) 
Where  the  service  is  heavy,  a  turntable  may  be  desirable.  This 
should  be  installed  at  some  readily  accessible  point.  It  may  be 
operated  by  hand  or  mechanically.  The  largest  locomotives 
require  80-ft.  turntables.  A  housing  shed  for  the  locomotives  is 
sometimes  built. 

The  importance  of  thoroughly  considering  track  arrangements 
cannot  be  overestimated.  A  complete  list  should  be  made  of 
materials  to  be  consumed,  and  means  provided  for  bringing  these 
in  at  points  where  they  are  to  be  used.  In  some  organizations, 
both  received  and  shipped  material  are  supervised  by  the  same 
storeroom  force;  the  in  and  out  trackage  and  storerooms  should 
then  be  adjacent.  In  large  works,  however,  a  small  part  only 
(from  a  standpoint  of  bulk)  of  the  material  ever  passes  physically 
through  the  storehouse.  The  greater  part  may  be  kept  else- 
where, possibly  without  even  a  roof  over  it.  Testing  room  and 
laboratory  should,  of  course,  be  considered  in  connection  with 
receipts  and  deliveries  of  material  or  product  to  be  inspected. 

OTHER  CONSIDERATIONS  IN  GROUPING 

The  disposal  of  liquid  or  other  wastes  must  be  provided  for, 
including  planning  for  drainage  of  rain  water  and  from  sanitary 
apparatus,  purification  of  trade  wastes  and  locations  for  dumps. 

The  location  of  the  power  plant  is  important.  This  must  be 
considered  from  a  standpoint  of  coal  receipts,  coal  storage,  ash 
disposal,  condensing  water  supply,  and  economy  of  heating  and 
power  transmission.  An  approximately  central  site  is  usually 
preferred. 

The  general  and  sales  offices,  if  a  part  of  the  works,  should  be 
rather  isolated,  away  from  noise,  heat,  odors  and  dirt.  The  works 
offices  should  be  central.  Due  consideration  must  be  given  to 
the  matter  of  location  of  "betterment"  departments  like  restau- 
rants, rest  rooms,  etc. 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     163 

Finally,  the  easiest  plot  to  lay  out  is  usually  of  triangular  form 
with  the  main  trackage  parallel  to  one  side  and  track  sidings 
entering  at  an  adjacent  vertex.  Land  cost  is  usually  a  small 
factor  in  total  expenditure  for  a  plant,  and  purchases  should  be 
made  on  a  liberal  scale.  Several  complete  alternative  layouts 
should  be  made  for  comparison  and  discussion. 

BUILDINGS:  TYPES  AND  MATERIALS 

It  is  wise  procedure  to  provide,  in  advance  of  any  detailed  work 
on  building  plans,  for  all  special  machinery,  power  and  heating 
equipment,  systems  of  artificial  lighting,  ventilation,  sanitation 
and  fire  protection.  In  this  way  much  unnecessary  expense  and 
delay  may  be  avoided.  The  cutting  through  of  foundation  walls 
for  pipes,  etc.,  is  unprofitable. 

The  duty  of  an  architect,  as  usually  understood,  is  to  make  all 
sketches,  general  and  detailed  drawings  and  specifications,  and  to 
generally  direct  and  supervise,  the  construction  of  buildings 
entrusted  to  him:  usually,  for  a  compensation  which  is  a  definite 
percentage  of  the  cost  of  those  buildings.  When  special  en- 
gineering problems  are  involved,  necessitating  the  cooperation 
of  a  mechanical  expert,  the  cost  of  such  expert  advice  is  paid  by 
the  proprietor.  In  large  enterprises,  continuous  local  supervision 
is  afforded  by  the  employment  of  a  "Clerk  of  the  Works,"  who 
is  engaged  by  the  architect,  but  paid  by  the  owner. 

Mill  buildings  are  usually  designed  by  engineers.  The  duty 
of  the  designing  mill  engineer  is  then  the  same  as  that  of  the 
architect;  and  when  architectural  problems  are  involved,  sug- 
gesting the  cooperation  of  an  artist,  that  cooperation  should  be 
called  for  by  the  engineer.  Many  questions  of  harmonious  out- 
line, appropriateness  and  general  effect  cannot  be  adequately 
dealt  with  by  even  the  best  engineer.  If  he  censures  the  archi- 
tect who  "saves"  the  cost  of  engineering  advice  regarding  power 
equipment,  he  cannot  excuse  himself  for  avariciously  withholding 
a  consulting  fee  from  the  architect  for  advice  as  to  the  develop- 
ment of  a  cornice. 

In  some  states,  no  person  may  design  and  construct  a  building 
unless  he  be  a  duly  licensed  architect.  Any  qualified  engineer 
may,  however,  obtain  a  license  as  an  architect  under  the  provi- 
sions of  the  law.  • 

The  carrying  out  of  the  engineer's  plans  may  be  by  a.  day  work 
under  engineering  or  proprietary  supervision;  b.  fixed  sum  con- 


164  WORKS  MANAGEMENT 

tract;  c.  cost-plus-percentage  contract;  d.  cost-plus-fixed-sum 
contract;  e.  contract  without  stipulation  of  price.  Method  a. 
may  result  in  the  soundest  construction,  but  there  is  usually  a 
lack  of  sufficiently  tested  organization  that  results  in  high  costs. 
Method  b.  is  most  common,  but  the  interests  of  proprietor  and 
contractor  are  almost  diametrically  opposed  and  too  much 
depends  upon  the  experience,  honesty  and  shrewdness  of  the 
engineer.  These  objections  have  led  to  c.  cost-plus-percentage 
contracts,  in  which  the  contractor  does  the  work  at  cost  plus  an 
agreed  percentage  of  profit.  Here  good  work  is  in  mutual 
interest;  but  economy  is  of  no  concern  to  the  contractor,  and  the 
engineer's  place  in  the  organization  may  be  even  more  com- 
manding than  under  b.  Cost-plus-fixed-sum  contracts  remove 
the  contractor's  incentive  toward  high  cost  of  construction,  and 
have  in  many  cases  been  highly  satisfactory.  Method  e.  has 
been  occasionally  employed,  where  speed  of  construction  was  a 
prime  factor,  or  where  the  proprietary  and  constructing  interests 
were  practically  identical,  as  in  the  building  of  many  railways. 

From  the  type  of  timber  frame  commonly  used  in  dwellings 
have  evolved  practically  all  forms  of  mill  building.  The  parts 
are  usually  erected  in  about  the  following  order:  sills,  floor  beams, 
posts,  angle  braces,  girts,  plates,  studs,  window  and  door  headers, 
ridge  and  supports  for  ridge,  and  rafters. 

The  modified  ''balloon  frame"  is  that  from  which  the  self- 
supporting  mill  building  is  more  directly  derived.  Here  posts 
and  studs  are  continuous  from  sill  to  plate,  and  the  upper  story 
floor  beams  rest  on  spiking  pieces  attached  to  the  vertical  mem- 
bers. The  angle  bracing  must  be  especially  thorough. 

A  timber  mill  building  may  be  (a)  practically  like  the  balloon 
frame  dwelling;  (b)  of  "standard  mill  construction,"  all  wood;  or 
(c)  of  masonry  and  wood,  "slow  burning."  Types  (b)  and  (c) 
are  the  only  ones  to  be  considered  in  important  design. 

The  simplest  of  the  so-called  "permanent  structures"  in 
which  timber  is  eliminated  from  the  frame  has  masonry  walls 
supporting  structural  steel  roof  trusses,  with  a  roof  cover- 
ing of  metal,  tile  or  boards — type  (d).  In  the  "masonry-filled- 
wall"  type  (e)  the  trusses  are  supported  by  steel  columns 
and  a  light  masonry  wall  fills  the  space  between  the 
columns.  In  the  all-metal  building  (f)  there  are  no  walls,  but 
an  outside  sheathing  of  corrugated  iron,  expanded  metal  and 
plaster,  or  asbestos  composition,  encloses  the  structure.  Recent 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     165 

specimens  now  exist  of  the  concrete  building  (g)  which  may  be 
either  monolithic  or  built  up  of  small  blocks.  In  either  case 
the  walls  are  hollow.  Parts  of  concrete  buildings  which  may  at 
any  time  be  subjected  to  tension,  like  floors,  roofs,  angles  and 
corners,  must  be  supported  or  reinforced  by  working  in  strips 
or  fabrics  of  metal.  A  concrete  beam  is  so  weak  in  tension  that 
at  a  very  moderate  ratio  of  span  to  depth  it  will  break  from  its 
own  weight.  There  exists  an  enormous  number  of  "systems" 
of  re-enforcing  and  many  of  these  are  controlled  by  contractors 
who  instal  them  in  buildings  which  they  design  and  construct. 
Concrete  buildings  are  fire  resisting,  rigid  and  permanent,  if 
properly  designed  and  put  up.1  It  is  estimated  that  in  ordinary 
concrete  mill  buildings,  about  two-thirds  the  entire  expense  is 
for  labor  and  timber  for  making  the  forms,  the  remaining  cost 
being  about  equally  divided  between  the  concrete  material  and 
the  steel.  Low  cost  is  attained  by  standardizing  forms  and  so 
designing  them  that  they  can  be  taken  down,  transported  and  re- 
erected  with  minimum  depreciation.  Re-enforcing  members 
must  be  protected  by  an  adequate  outside  thickness  of  concrete; 
usually  each  inch  of  thickness  will  protect  the  steelwork  about 
one  hour  during  a  fire. 

The  cost  of  mill  buildings  increases  in  about  the  following  order 
of  types:  b,  c,  g  (re-enforced),  f,  e,  d.  A  far  higher  cost  is  reached 
when  a  building  of  type  (d)  has  the  steel  fireproofed  with  terra- 
cotta tile  or  similar  material;  one  that  was  formerly  considered 
prohibitive,  although  under  present  price  conditions,  this  is  no 
longer  the  case. 

The  choice  of  a  type  is  somewhat  determined  by  the  imposed 
loads  and  dimensions.  Clear  spans  of  50  and  75  ft.  are  of  course 
impossible  with  untrussed  timber  construction.  With  heavy 
floor  loads,  also,  steel  soon  becomes  essential,  although  with 
careful  design,  close  posts,  etc.,  an  all  wood  building  may  support 
a  load  as  great  as  300  Ib.  per  sq.  ft.  on  each  of  four  or  five  stories. 
A  protected  steel  beam,  however,  is  to  be  preferred  to  closely 
spaced  timber  beams. 

CONSTRUCTION  CONTRACTS 

A  contract  is  an  agreement  between  two  qualified  parties  to 
do  or  refrain  from  doing  certain  specified  things.  In  an  equip- 

1  Cement  becomes  dehydrated  and  reduces  to  a  dry  powder  at  about  1100°  F.,  but  as  this 
material  is  a  nonconductor  of  heat,  the  damage  from  a  fire  of  ordinary  duration  is  apt  to  be 
confined  to  the  surface 


166  WORKS  MANAGEMENT 

ment  or  construction  contract,  one  party  (the  contractor)  agrees 
to  furnish  certain  machinery  or  structures  to  the  other  party 
(the  owner)  in  consideration  of  the  payment  of  a  certain  sum  of 
money  by  the  owner  to  the  contractor.  An  ordinary  contract 
binds  the  executors,  administrators,  successors  or  assigns  just  as 
it  binds  the  original  parties. 

The  place  and  date  of  making  the  contract  may  have  bearing 
on  its  lawfulness,  and  should  be  specified.  A  corporation  may 
not  engage  in  undertakings  not  authorized  by  its  charter.  In 
some  states  a  contract  made  on  a  Sunday  or  a  holiday  is  un- 
enforcible.  Contracts  involving  certain  minimum  money 
values  must  be  in  writing  to  be  valid.  A  contract  for  yearly 
employment  is  not  recognized,  in  some  states,  unless  in  writing. 

The  usual  preliminaries  to  a  construction  contract  are  (a)  the 
issuance  of  specifications  and  an  invitation  to  bidders,  (b)  the 
receipt  of  bids,  (c)  possibly  counter-offers.  Execution  of  the 
contract  follows  when  an  informal  agreement  has  been 
reached.  The  contract  price  for  work  must  be  sustained  by  a 
"bid"  or  "proposal"  price;  if  a  bid  is  revised  after  it  has  been 
made,  it  should  be  revised  in  writing.  A  bid  is  binding  only 
after  it  has  been  received;  acceptance  of  a  bid  is  binding  on  both 
parties  as  soon  as  such  acceptance  is  sent,  whether  it  is  received 
by  the  bidder  or  not.  A  "conditional  acceptance"  is  merely  a 
counter-offer,  a  revised  "bid."  It  binds  its  maker  as  soon  as 
received  by  the  original  bidder.  A  contract  is  not  completed 
until  signed  and  "delivered"  or  mutually  released.  Lapse  of 
time  may  outlaw  a  contract;  i.e.,  make  compulsory  performance 
impossible.  The  effect  of  a  seal  may  extend  the  period  during 
which  the  contract  is  legally  enforcible. 

Municipal  contracts  must  usually  go  to  the  lowest  bidder,  bids 
being  publicly  opened.  Such  contracts  may  be  ruled  illegal  be- 
cause of  non-compliance  with  statutory  requirements  as  to 
advertising,  etc.  Contracts  for  work  done  under  definite 
appropriation  should  never  be  made  for  the  full  amount  of  the 
appropriation,  else  compensation  for  extra  work  may  be  difficult 
or  impossible  of  attainment.  Public  agents  are  not  liable  for 
negligence.  Statutes  of  limitation  do  not  operate  against 
government.  Informal  municipal  contracts  are  not  recognizable. 

In  important  contracts,  whether  public  or  private,  sureties 
may  be  required.  The  surety  is  a  reliable  guarantor  of  perfor- 
mance— usually  a  company  of  large  financial  resources — and  is  of 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     167 

course  compensated  for  its  services.  If  the  'contractor  defaults, 
the  surety  must  carry  on  his  work  or  otherwise  relieve  the  owner 
from  loss.  The  surety  guarantees  performance  of  specific 
obligations:  if  these  obligations  be  subsequently  changed,  the 
guarantee  does  not  apply. 

The  time  of  completion  of  contract  is  usually  an  essential 
matter.  This  may  be  guaranteed  by  the  surety,  or  there  may  be 
a  forfeiture  clause,  under  which  the  contractor  loses  a  certain 
part  of  his  remuneration  in  case  of  failure  to  complete  on  time. 
Sometimes  the  forfeiture  is  a  definite  sum  of  money  for  each 
day's  delay;  sometimes  there  is  a  corresponding  bonus  paid  for 
each  day  saved.  Forfeitures  may  be  imposed  either  as  "liqui- 
dated damages"  or  as  "penalty."  The  attitude  of  the  courts 
toward  the  two  differs. 

Under  a  construction  contract,  the  architect  or  engineer 
becomes  the  agent  of  the  owner  (see  page  127).  His  respon- 
sibilities are  regarded  severely  in  law.  He  must  not  receive  com- 
missions from  contractors  or  dealers  (the  owner  may  recover 
such  if  paid),  must  have  no  interest  in  the  contract,  and  must 
not  hold  relations  of  any  sort  in  conflict  with  those  of  the 
owner. 

The  contract  price  will  frequently  exceed  the  engineer's 
preliminary  estimate  and  the  actual  cost  of  the  work  will  almost 
invariably  exceed  the  contract  price.  Some  of  the  reasons  are 
sufficiently  obvious;  planning  is  not  an  exact  science.  The  better 
the  engineer  and  the  more  definite  the  owner's  conception  of 
what  is  wanted,  the  fewer  (assuming  a  proper  allowance  of  time 
for  working  up  the  design)  will  be  the  extras  or  additional  work 
necessary  to  complete  the  job  beyond  what  is  covered  by  the 
contract.  Extras  are  an  inverse  measure  of  efficient  planning. 

The  cause  for  excess  of  contract  price  over  estimate  lies  in  the 
illegal  "pools"  which  have  more  or  less  generally  prevailed  among 
construction  contractors.  They  operate  as  follows:  A  trust- 
worthy individual  is  appointed  as  "secretary."  Whenever  a 
contractor  prepares  a  bid  he  notifies  the  secretary.  The  latter  in 
return  tells  him  to  "add  blank  dollars  for  the  association."  The 
amount  of  addition  is  a  matter  of  conscience;  10  per  cent,  is  not 
unusual.  This  is  eventually  divided  either  among  the  bidders 
or  among  all  the  contractors  in  the  district.  Sometimes  a  small 
proportion  is  generally  distributed,  while  the  greater  part  is 
divided  between  those  who  have  been  honored  with  the  requests 


r 


168  WORKS  MANAGEMENT 

for  bids.  Occasionally  a  lazy  contractor  will  ask  the  secretary 
to  give  him  a  safe  bid  for  the  job,  which  he  does  not  happen  to 
want.  This  saves  him  the  trouble  of  making  an  estimate.  The 
low  bidder  may  be  decided  upon  in  advance  and  his  may  be  the 
only  estimate  made.  If  there  are  contractors  in  the  district  who 
are  not  members  of  the  ''Association"  it  becomes  a  matter  of 
some  moment  to  know  whether  they  are  bidding  or  not.  Some- 
times a  chance  must  be  taken.  The  way  out  of  this,  for  the  owner 
or  engineer,  is  to  secure  bids  from  such  "scab"  contractors  if 
possible;  even,  when  necessary,  by  going  out  of  the  district.  But 
some  of  the  building  trade  contractors  have  been  nationally 
"organized"  for  the  purpose  described. 

The  specifications  are  a  description  of  the  work  to  be  done  under 
a  contract.  They  are  accompanied  with  plans  or  drawings,  and 
a  clause  in  the  specifications  should  refer  to  the  plans,  specifically 
identifying  them  by  number  or  otherwise.  The  contract  should 
contain  a  clause  incorporating  the  specifications.  The  contract 
includes  the  business  agreement;  the  specifications  describe  in  de- 
tail the  work  to  be  done.  Both  necessarily  contain  a  number  of 
general  clauses,  which  few  people  stop  to  read.  There  is  a 
"Uniform  Contract"  for  construction  work  recommended  by 
the  American  Institute  of  Architects  and  the  National  Asso- 
ciation of  Builders  which  contains  a  standard  set  of  general 
clauses.  There  are  in  some  standard  forms  provisions  so  unrea- 
sonable as  to  be  ridiculous.  They  virtually  amount,  some  one 
has  said,  to  the  statement  from  the  engineer  to  the  contractor, 
"if  there  is  anything  I  have  forgotten,  you  have  got  to  furnish  it 
anyway."  But  certain  general  stipulations  are  of  course  neces- 
sary; such  as  those  relating  to  the  method  of  authorization  and 
basis  for  compensation  of  extra  work;  provision  for  arbitration; 
authority  to  make  sub-contracts;  responsibility  for  insuring  and 
otherwise  caring  for  material,  and  for  personal  injuries  to  workmen; 
compliance  with  local  building  ordinances;  responsibility  under 
mechanic's  lien  laws;  and  payments  on  account,  which  may  be  a 
fixed  proportion  of  the  value  of  work  done,  as  estimated  by  the 
engineer,  or  a  definite  sum  at  various  stipulated  stages  of  comple- 
tion of  the  work. 

VALUATIONS  OF  MANUFACTURING  PLANT 

"Value"  is  not  a  very  definite  property  of  matter.     What  we 
may  call  the  value  of  a  thing  depends  upon  the  purpose  for  which 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     169 

the  valuation  is  made.  A  thing  may  be  appraised  at  the  price 
at  which  the  owner  is  willing  to  sell  or  at  that  at  which  some  one 
is  willing  to  buy  it;  buildings  with  power  and  heating  equipment 
or  privileges  may  be  valued  for  the  purpose  of  determining  a  fair 
rent,  insurance  or  tax  rate.  A  property  may  be  condemned  for 
public  purposes  and  the  valuation  is  then  made  to  determine 
what  remuneration  shall  be  paid  the  owner.  It  may  be  appraised 
as  a  physical  entity  on  the  security  of  which  money  is  to  be 
loaned;1  the  value  is  then  that  which  would  be  realized  at  a  forced 
sale;  or  for  the  adjustment  of  fire  or  other  losses,  in  which  case 
value  will  not  exceed  cost  of  replacing  and  may  be  less  than  this 
cost.  In  general,  value  cannot  be  absolutely  determined  except- 
ing at  the  moment  of  a  sale;  two  parties  (whose  interests  are 
opposed)  may  at  such  moment  be  presumed  to  agree  as  to  the 
value  of  the  thing  sold  at  that  moment. 

There  are  two  general  bases  for  approximate  valuations  of 
manufacturing  plant.  The  first  considers  the  property  as  made 
up  of  so  many  pieces  of  physical  material,  the  values  of  which 
may  be  ascertained  by  comparison  with  similar  materials  else- 
where. If  a  factory  building  contains  ten  million  bricks,  it  is  not 
difficult  to  tell  how  much  the  bricks  in  the  building  are  worth. 
The  second  basis  of  valuation  regards  the  plant  as  one  element  in 
a  productive  enterprise,  and  determines  its  value  from  a  consider- 
ation of  the  profits  of  the  enterprise.  Value  in  this  sense  has  no 
relation  whatever  with  cost.  The  first  method  seems  definite 
and  straightforward;  but  the  value  which  it  gives  is  not  that  at 
which  the  owner  would  sell  or  another  would  expect  to  buy.  It 
is  worthless  as  the  basis  of  a  sale,  unless  the  plant  is  clearly  un- 
profitable, and  usually  worthless  even  then.  Moreover,  it  pre- 
sents difficulties.  It  is  a  very  difficult  thing,  for  example,  to 
determine  what  the  site  is  worth.  Regard  must  be  paid  not  only 
to  local  real  estate  conditions  but  also  to  competitive  conditions; 
the  effect  of  the  site  on  transportation  charges.  A  bad  location 
in  this  respect  is  equivalent  to  a  mortgage  on  the  plant.  Ques- 
tions of  water  supply,  water-power,  cost  of  power,  tax  rate, 

When  a  corporation  seeks  to  "float"  an  issue  of  bonds,  many  considerations  will  influ- 
ence the  purchasing  syndicate  in  its  judgment  as  to  the  safety  of  the  proposed  issue.  There 
will  be  an  examination  of  physical  property  by  an  engineer  to  determine  its  original  and 
replacement  cost;  a  consideration  of  the  profits  of  the  business  by  an  auditor;  legal  and 
financial  advice  regarding  value  of  intangible  resources — patents,  franchises,  etc.  The 
value  of  its  securities  in  the  market  will  be  regarded,  and  the  margin  of  earnings  above  pro- 
posed requirements  for  bond  interest  will  be  carefully  considered.  Good  business  judgment 
as  to  the  market  position  of  the  industry  is  always  sought  for. 


170  WORKS  MANAGEMENT 

character  of  local  municipal  government,  labor  supply,  cost  of 
construction  work,  facilities  for  installing  equipment,  oppor- 
tunity for  safe  disposal  of  wastes,  prevailing  hours  and  wages  for 
workmen,  probable  nature  of  the  future  development  of  the 
neighborhood — all  of  these  are  factors  which  must  be  considered 
in  valuing  land  alone.  These  or  similar  factors  enter  into  the 
valuation  of  other  physical  elements;  so  that  whether  we  wish  it 
or  not,  we  cannot  fix  a  valuation  for  a  manufacturing  property 
without  some  consideration  of  its  earning  power. 

Consider  also  the  case  of  a  hydro-electric  company.  Its 
plant  might  have  cost,  and  as  material  be  worth,  $5,000,000, 
but  if  the  flow  of  water  were  unexpectedly  variable,  one  might 
hesitate  before  buying  its  bonds  even  when  issued  to  the  aggre- 
gate of  only  half  that  sum. 

The  first  of  the  methods  of  appraisal  invariably  merges  into  the 
second.  The  second  is  fairer.  If  a  plant  by  long  good  organiza- 
tion and  management  earns  $100,000  a  year,  it  may  be  worth 
$1,000,000  even  though  it  cost  only  $300,000.  Valuation  on  the 
basis  of  earning  power  puts  a  premium  on  efficiency.  But  it 
must  not  be  forgotten  that  excessive  profits  may  be  due  to  exces- 
sive prices,  and  a  valuation  contingent  upon  unreasonable  prices 
is  hazardous  because  of  the  possibility  of  competition. 

Under  the  second  method,  the  value  of  the  plant  is  not,  how- 
ever, a  capitalized  representation  of  its  earnings:  it  is  the  cost  of 
that  plant  which,  erected  to-day,  could  under  equally  good  manage- 
ment produce  equally  good  results.  This  is  the  value  of  the  plant; 
not  the  value  of  the  business,  which  includes,  besides  plant,  an 
organization,  with  special  and  technical  knowledge;  good  will, 
that  is,  outstanding  public  and  private  accounts  and  future  in- 
creases therein  which  have  been  already  earned  by  development 
expenditures;  and  possibly  franchises,  or  special  (often  exclusive) 
rights  to  operate  in  and  through  streets  or  elsewhere. 

Mr.  H.  L.  Doherty  (who  has  suggested  much  of  the  foregoing) 
lists  the  following  classification  of  elements  of  physical  and 
organization  value  in  public  service  industries: 

A.  Real  Estate. 

B.  Physical  property,  at  cost  less  depreciation,  based  not  on 
books,  but  on  inventory. 

C.  Omissions,  2  per  cent.,  to   cover  physical  property  not 
found. 

D.  Engineering  and  supervision,  5  per  cent,  of  B  and  C. 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     171 

E.  Ordinary  contingencies,  as  in  construction,  10  per  cent,  of 
B  and  C. 

F.  Legal  expenses  during  construction. 

G.  Insurance  risk  while  building;  public,  employer's  and  fire 
risks  before  operating. 

H.  Allowance  for  piecemeal  construction.  10  per  cent,  of  B, 
C  and  D. 

I.  Interest  while  building,  6  per  cent,  of  A,  B,  C,  D,  E,  F,  G. 

J.  Excess  of  actual  over  computed  cost,  as  in  construction, 
10  per  cent,  of  A-G,  I. 

K.  Organization — printing,  engraving,  promotion  (the  last 
often  as  much  as  8  per  cent,  on  entire  investment). 

L.  Working  capital — stocks  of  materials — accounts  receiv- 
able. 

M.  Unbilled  product. 

N.  Operating  organization  salaries  and  expenses,  prior  to 
completion  of  plant. 

0.  Operating  expenses  in  excess  of  earnings  during  develop- 
ment period. 

P.  Interest  in  excess  of  earnings  during  development. 

Q.  Cost  of  developing  business  not  included  in  O  and  P, 
usually  exceeding  half  the  gross  receipts  for  one  year. 

POWER  VALUATIONS 

The  determination  of  the  value  of  a  water  power  privilege  is 
particularly  complicated.  Such  privileges  are  frequently  con- 
demned by  municipalities  aiming  at  the  improvement  of  the 
water  supply.  In  the  celebrated  Worcester  case,  the  courts 
awarded  the  claimants  (owners  of  the  condemned  property) 
$500,000  and  interest  for  the  loss  of  about  1000  horse  power, 
which  had  been  available  during  eleven  months  of  the  year.  The 
claimants  maintained  that  a  horse  power  is  a  commodity  having 
a  definite  ascertainable  market  value;  that  the  acts  of  the  city 
had  confiscated  such  commodity,  and  they  asked  for  damages, 
$1,500,000. 

The  city  pleaded  that  the  claimants  had  not  lost  a  commodity, 
but  what  the  law  calls  an  easement  to  their  estates.  It  main- 
tained that  the  loss  to  the  claimants  was  merely  the  difference 
between  the  original  value  of  their  estates  and  the  value  after 
the  loss  of  the  easement.  It  proposed  to  ascertain  this  difference 


172  WORKS  MANAGEMENT 

by  ascertaining  the  difference  in  cost  of  water-developed  and 
steam-developed  power.  The  case  was,  "Every  water  power's 
value  is  fixed  by  some  steam  engine." 

There  are  arguments  in  favor  of  the  city's  case.  The  mills  had 
not  been  deprived  of  power,  but  of  water,  with  which  they  might 
have  made  power.  Virtually,  they  were  deprived  of  coal, 
because  to  replace  the  lost  power  they  would  have  to  buy  coal. 
Figures  obtained  from  25  mills  using  steam  power  showed  the 
cost  of  a  horse  power  for  a  year  to  average  $50.14.  But  the 
standard  which  the  city  aimed  to  establish  is  one  that  could  not 
be  applied.  A  horse  power  for  a  year  from  steam  might  cost  $50 
in  a  mill  where  the  working  day  was  of  10  hours,  but  it  might  as 
easily  cost  $100  where  the  working  day  was  24  hours.  Should  the 
one  owner  receive  a  compensation  of  $100  and  another  only  $50, 
merely  because  the  latter' s  was  a  10  hour  plant  and  the  former's 
one  running  24  hours? 

On  this  basis,  too,  the  water  power  might  be  given  an  excessive 
value.  Not  a  dozen  plants  in  New  England  have  a  constant  flow 
of  water  throughout  the  year.  Most  of  them  maintain  a  steam 
plant  in  reserve.  Their  water  power  is  worth  (if  we  accept  the 
city's  contention)  the  sum  of  money  which  would  have  to  be 
invested  to  maintain  an  equivalent  steam  plant  in  the  same  place, 
less  the  cost  of  the  reserve  steam  plant  which  must  be  maintained 
for  emergencies  under  water  power  service.  Then  there  is  the 
further  complication  of  operating  cost  for  such  reserve  steam 
plant,  when  it  runs;  and  the  possibility  of  using  exhaust  steam 
for  heating  still  further  confuses  the  whole  question.  A  com- 
plete discussion  of  this  interesting  subject  may  be  found  in  the 
Transactions  of  the  American  Society  of  Mechanical  Engineers, 
Vol.  XXVI,  paper  by  Mr.  Chas.  T.  Main. 

Absolute  ownership  of  water  power  privileges  by  manufactur- 
ing plants  is  perhaps  less  common  than  tenure  on  long  leases,  the 
power  being  developed  by  the  leasing  company.  A  common 
unit  for  the  sale  is  then  the  amount  of  water  which  will  flow 
through  an  aperture  of  given  depth  and  area,  with  a  standard 
"head  "  of  water  above  the  top  of  the  aperture.  The  same  device 
may  be  used  for  limiting  the  delivery  to  a  mill  which  actually 
owns  its  right. 

At  Lawrence,  Mass.,  about  10,000  horse  power  was  developed 
at  a  cost  of  $1,300,000  for  dam,  canals  and  machinery.  The 
fixed  expenses  chargeable  against  the  development  are  about 


THE  PHYSICAL  BASIS  OF  THE  INDUSTRY     173 

$11.70  per  horse  power  per  year.  It  costs  about  $2.  more  to 
care  for  and  maintain  the  equipment,  so  that  the  mills  get  their 
power  for  $13.70  per  year.  The  cost  of  maintaining  and  operat- 
ing a  steam  plant  in  the  same  district,  including  fixed  charges,  is 
about  $21.80  per  year.  A  credit  of  25  per  cent,  of  this,  or  $5.45, 
is  made  to  the  steam  plant  because  it  furnishes  exhaust  steam 
for  heating,  for  which  coal  would  otherwise  have  to  be  purchased. 
This  leaves  $16.35  per  year,  as  the.  cost  of  steam  power.  The 
value  of  the  water  power  (on  the  city  of  Worcester's  basis)  is 
then  $16.35  —  $13.70  =  $2.65  per  year;  or,  capitalized  at  5  per  cent. 
say,  $53,  per  horse  power.  But  if  the  price  of  coal  should  so 
decrease  that  the  total  cost  of  producing  steam  power  were 
reduced  $2.65  per  year,  or  12  per  cent,  (not  at  all  an  improbable 
fluctuation),  the  water  power  would  on  this  basis  have  no  value 
whatever.  It  would  continue  in  use,  however,  because  fixed 
charges  on  the  development  would  have  to  be  paid  anyway; 
but  it  would  not  be  saleable  at  its  physical  value. 


EXERCISES 

CHAPTER  I 

1.  A  paper  mill  runs  4  weeks  on  cartridge  paper,  producing  960,000  Ib. 
at  a  cost  of  $38,400;  then  6  weeks  on  "bond/7  turning  out  720,000 
Ib.,  costing  $50,400.     What  is  the  percentage  difference  in  cost  per 
pound  of  the  two  kinds  of  paper? 

Ans.,  bond  costs  75  per  cent,  more  than  cartridge. 

2.  The  same  mill,  in  order  to  determine  relative  costs,  makes  test  runs 
of  24-hour  duration  on  each  grade,  producing  20,000  Ib.  of  bond  and 
40,000  Ib.   of  cartridge.     The  cost  of  the  day's  operation  is  $1360 
in  the  first  case,  $1575  in  the  second.     Find  the  percentage  difference 
of  cost  per  pound. 

Ans.,  bond  costs  98  per  cent,  more  than  cartridge. 

3.  Which  of  the  methods  suggested  in  Exercises  1  and  2  is  likely  to  give 
results  more  closely  corresponding  to  usual  costs?     What  difficulties 
arise  in  making  cost  determinations  by  either  of  the  methods?     Discuss 
the  probable  accuracy  of  estimates  of  daily  total  cost  in  Exercise  2. 

4.  A  linseed-oil  mill  uses  the  weight  of  oil  output  as  its  cost  divisor.     During 
one  month,  it  crushes  100,000  bu.  of  seed,  yielding  17  Ib.  of  oil  per 
bushel,  the  working  cost  being  $15,000  and  the  seed  costing  $0.867 
per  bushel.     During  the  second  month  it  uses  seed  costing  $1.00 
per  bushel,    crushes  110,000  bu.  at  a  working  cost  of   $16,000,  and 
shows  a  yield  of  19  1/2  Ib.  of  oil  per  bushel.     If  the  oil  yield  plus  the 
cake  yield  aggregates  55  Ib.  per  bushel  in  either  case,  and  oil  is  worth 
37  1/2  cents  per  gallon  (7  1/2  Ib.)  while  cake  is  worth  1  cent  per  pound, 
compare  the  profits  for  the  two  months  and  show  that  these  have  no 
relation  to  the  respective  unit  costs. 

Ans.,  in  the  first  month  the  apparent  cost  of  oil  per  pound  is  $0 . 0598 
and  the  profits  for  the  month  are  $21,300.  In  the  second  month  the 
figures  are  respectively  $0.059  and  $20,300.  Although  selling  prices 
have  remained  the  same,  the  profits  have  decreased  in  spite  of  a  decrease 
in  unit  "cost  of  operation." 

5.  A  bushel  of  flaxseed  costing  $1.00  weighs  56  Ib.  and  yields  19  Ib. 
of  oil  and  36  Ib.  of  cake.     A  ton  (2000  Ib.)  of  cottonseed  yields  300 
Ib.  of  crude  oil  and  800  Ib.  of  cake.     If  mill  working  costs  are  the 
same  in  either  case,  at  the  rate  of  14  cents  per  56  Ib.,  and  these  products 
represent  all  the  marketable  product  from  the  seeds,   and  if  both 
cottonseed  cake  and  linseed  cake  are  worth  1  cent  a  pound,  find  the 
price  of  cottonseed  per  ton  at  which  the  cost  of  linseed  oil  per  pound 
is  just  twice  that  of  crude  cottonseed  oil. 

Ans.,  $9.157. 

175 


176  WORKS  MANAGEMENT 

6.  In  a  locomotive  works  building  eight  engines  in  a  given  month,  the 
corresponding    cost    of    production    is    $148,300.     The    locomotives 
weigh  80,000,    116,000,    180,000,    185,000,   210,000,   212,000,   220,000 
and  280,000  lb.,  respectively.     Find  (a)  the  "cost  per  locomotive," 
using   the  number  produced  as  the  divisor;    (b)  the  cost  per  100  lb. 
of  product;  (c)  the  cost  per  ton  of  product;  (d)  the  cost  of  each  loco- 
motive, based  on  item  (b)  and  the  weight  of  the  locomotive. 

Ans.,  (a)  $18,537.50;  (b)  $10.00;  (c)  $200.00;  (d)  $8000,  $11,600, 
$18,000,  $18,500,  $21,000,  $21,200,  $22,000,  $28,000. -Total,  $148,300. 

7.  In  the  case  of  the  plant  making  motors  and  lamps,  page  5,  the  costs  of 
materials  are:  for  motors,   $700;  for  lamps,   $180.     Find  the  total 
costs  (labor  and  materials)  of  one  lamp  and  one  motor. 

Ans.,  motor  $80;  lamp  $0.08. 

8-  The  selling  price  of  a  standard  automobile,  at  the  factory  door,  is 
$1500.  During  a  year,  1000  such  machines  are  shipped  at  a  freight 
cost  of  $30,000,  the  sum  of  distances  transported  being  360,000  miles. 
Using  the  arbitrary  factor  of  cost  per  machine  per  mile  transported, 
find  the  price  to  be  charged  a  man  600  miles  away  for  a  machine  to 
be  delivered  f.o.b.  his  own  city. 
Ans.,  $1550. 

CHAPTER  II 

9.  Assume,  in  the  cases  of  the  two  power  plants,  page  8,  that  two  types  of 
plant  are  possible:  one  costing  $100  and  the  other  $200  per  kilowatt 
capacity;  and  that  operating  costs  corresponding  are  3  cents  and 
2  cents  per  kilowatt-hour,  respectively.  If  fixed  charges  may  be 
taken  at  15  per  cent,  of  the  first  cost  per  year,  find  the  total  cost  per 
kilowatt-hour  for  the  high-priced  and  low-priced  plants  in  each  of 
the  two  kinds  of  service  described. 

Ans.,  3.71  cents  for  the  continuously  running  $100  plant;  3.42  cents 
for  the  continuously  running  $200  plant — note  the  decrease;  34.25 
cents  for  the  $100  reserve  plant;  64 . 5  cents  for  the  $200  reserve  plant — 
note  the  increase  in  this  case. 

10.  Group  the  following  scattered  items  of  cost  in  accordance  with  the 
chart  on  page  10,  and  state  the  value,  the  cost,  the  prime  cost  and  the 
factory  cost: 

Superintendence $160.05  General  office  expense.  ..$     87.80 

Factory  office  expense..  .  .    185.20  Pay  roll 1015.45 

Piece  work  labor 622.00  Salesmen's  expense 64.30 

Freight  on  raw  material. .  .     22 . 50  Taxes 24 . 30 

Freight  on  product 65 . 40  Power 415 . 30 

Storeroom  charges 945.80  Light 84.30 

Laboratory  expense 65.45  Depreciation 29.03 

Profit 410.04 

2066.40  2130752 

Ans.,prime  cost  $2671.20;  factory  cost  $3569.38;  cost  $3786.88; 
value  $4196.92. 


EXERCISES 
11.  Take  the  following  figures: 


177 


Cost  of  fuel, 

Tons  used 

Product,  Ib. 

January 

$6500 

1800 

179,500 

February                    

8500 

2100 

182,000 

March 

7200 

1820 

206,000 

\pril            

6600 

1830 

204,000 

Find  the  price  of  fuel  per  ton,  the  consumption  of  fuel  per  pound  of 
product,  and  the  cost  of  fuel  per  pound  of  product,  for  each  month. 
If  these  were  the  conditions  in  an  actual  plant,  what  further  investi- 
gations would  be  warranted? 

12.  Suggest  the  general  headings  (not  the  specific  items)  for  a  classification 
of  accounts  in  operating  a  power  plant. 

13.  Reclassify  the  39  accounts  listed  on  pages  13  and  14  to  correspond 
with  the  general  plan  of  the  chart  on  page  10.     Suggest  reasons  why  the 
new  method  of  classification  would  be  unsatisfactory. 

14.  Criticise  the  following  methods  of  paying  employees: 

(a)  By  check,  in  small  isolated  communities. 

(b)  In  cash,  upon  identification  of  the  men. 

(c)  By  check,  in  cities. 

15.  Suggest  a  cost  divisor  for  (a)  a  school,  (b)  a  department  store. 


CHAPTER  III. 

16.  In  a  power  plant,  9  Ib.  of  steam  are  produced  by  the  boilers  for  each 
pound  of  coal  burned.     Each  pound  of  coal  contains  14,000  heat  units. 
Each  pound  of  steam  represents  1000  heat  units.     Of  the  total  heat 
supplied  by  the  fuel  at  the  boiler,  20  per  cent,  goes  up  the  stack,  a 
portion  appears  in  the  steam,  2  per  cent,  is  lost  to  the  ash  pit  and 
the  remainder  is  lost  by  radiation.     Find  the  boiler  efficiency  and 
the  number  of  heat  units  lost  from  each  pound  of  coal  by  radiation. 
Ans.,  efficiency  =  64 . 3  per  cent.;  radiation  loss,  1920  heat  units. 

17.  In  Exercise  16  the  engines  consume  30  Ib.  of  steam  per  horse  power 
per  hour  (2545  heat  units  =  1  h.p.  hour).     The  steam  expended  in 
driving  auxiliary  machinery  and  lost  in  transmission  is  10  per  cent, 
of  that  received  by  the  engines.     The  engines  are  direct-connected 
to  electric  generators,  and  the  switchboard  shows  that  5/8  kilowatt 
of  electrical  output  is  obtained  from  each  horse  power  at  the  engines. 
One  kilowatt  =  1 . 34  horse  power.     Find  (a)  the  efficiency  from  steam 
to  engine  power,  (b)  the  efficiency  from  engine  power  to  switchboard, 
and  (c)  the  efficiency  from  boiler  outlet  to  engine  throttle. 

Ans.,  (a)  8.181  per  cent.,  (b)  83.8  per  cent.,  (c)  91  per  cent. 

18.  In  Exercises  16  and  17,  make  a  list  showing  the  disposition  of  the 
14,000  heat  units  received  in  each  pound  of  coal,  giving  percentages. 

12 


178  WORKS  MANAGEMENT 

Ans., 

To  stack,  2800  h.  u.=20  per  cent. 

To  ash  pit,  280  h.  u.  =2  per  cent. 

Radiation  at  boilers,  1920  h.  u.  =  13 . 7  per  cent. 

Transmission  and  auxiliary  loss,  810  h.  u.=5.79  per  cent. 

Loss  between  engine  and  switchboard,  112.2  h.  u.  =0.80  per  cent. 

Loss  at  engine,  7497  h.  u.  =  53 . 56  per  cent. 

Useful  work,  580.8  h.  u.=4.15  per  cent. 

Total,  14,000  h.  u.  =  100  per  cent. 

19.  Compute  the  values  of  items  (m)  and  (o),  page  19,  for  Exercises  16 
and  17. 

Ans.,  9  lb.,  48  Ib. 

20.  Draw  off  from  statistical  record  No.  3,  page  24,  a  statement  like  that  of 
Record  No.  2,  page  22,  for  both  mills  A  and  B,  for  the  operating 
costs  of  the  fiscal  year  1910-'!!. 

21.  Divide  each  figure  in  statistical  record  No.  4,  page  26,  by  12;  chart 
these  records  along  with  those  for  mill  A  in  Exercise  20,  and  explain 
why  the  two  graphs  differ. 

22.  Prepare  a  statement  like  No.  4,  page  26,  for  mill  B,  and  chart  the 
results  in  red  ink  on  the  diagram,  page  25. 

23.  In  the  consumption  totalization  of  page  26,  the  output  for  May  is 
1,150,000  kilowatt-hours  and  the  coal  consumption  is  2,875,000  lb. 
Find  the   "coal  per  kilowatt-hour  to  date"  for  May,   and  compare 
this  figure  with  the  arithmetical  average  of  the  corresponding  figures 
for  the  five  months. 

Ans.,  3.01  lb.;  arithmetical  average,  3.916. 

24.  Prepare,  from  the  data  given  in  Record  No.  2,  page  22,  a  chart  of  the 
type  first  described  under  "Special  Records,"  page  27. 

25.  An  improvement  expenditure  of  $100,000  has  the  following  effect: 

Months.  Gross  earnings. 

January $110,000 

February. 111,000 

March 113,000 

April 114,300 

May 115,800 

June 117,200 

Does  the  expenditure  appear  likely  to  "pay  for  itself"  in  6  years? 

CHAPTER  IV 

26.  In  a  community  of  100  men,  raw  materials  are  free  and  the  value 
of  commodities  produced  is  distributed  in  equal  shares.     During  the 
first  year,  the  production  is  $100,000  and  the  wage  per  man  $600. 
During   the  second  year  a  profit-sharing  system  is  introduced,   so 
that  each  man  is  paid  $900  and  the  total  production  is  $175,000. 
Compare  results  as  to  wage  rate,  amount  of  labor  per  man  and  total 
wealth  produced  per  man. 

Ans.,  wage  rate  increases  50  per  cent.,  production  per  man  increases 
75  per  cent.,  exertion  of  each  man  presumably  increases  75  per  cent. 


EXERCISES  179 

27.  Under  conditions  like  the  preceding  suppose  the  men  to  work  fewer 
hours  during  the  second  year,  to  receive  the  same  wages  as  during 
the  first  year,  and  to  produce  $100,000  at  50  per  cent,  greater  speed 
than  formerly.     What  results  follow? 

Ans.,  the  total  wealth  produced  will  be  unchanged,  the  wage  per  man 
will  be  unchanged,  the  hours  of  work  per  day  will  be  reduced  43  per 
cent.,  the  effort  by  each  man,  measured  as  the  product  of  strength 
exerted  and  time,  will  be  unchanged.  The  men  are  working  5.7 
hours  per  day,  rapidly,  instead  of  10  hours  per  day,  slowly. 

28.  Assume  the  following  data: 

Workman's  No.  Shop  Order  No.  Charge. 

304                           127,436  $31 . 19 

302                           127,436  11.22 

308  127,436  19.47 

306  127,436  12.24 

307  127,436  18.11 

309  127,436  36.60 
320  210,421  7.65 
323  209,640  6.40 
325  227,044  7.35 

360  300,001  4.50 

361  309,090  6.65 
382  411,212  5.35 
304  485,840  5.20 
309  490,601  5.95 
309  512,311  3.20 
307  584,390  6.05 
320  590,090  .95 
320  620,311  1.65 
309  642,095  2.20 
361  674,430  1.90 
304  682,255  4.05 

Make  out  the  pay  roll  and  prepare  a  statement  of  expenses  like  that 
on  page  31. 

29.  Prepare  copy  for  the  printer  for  the  shop  orders,  time  cards  and  piece 
work  slips  necessary  under  the  system  described  on  page  31. 

30.  The  day  rate  of  $3.00  gives  a  production  of  20  units  per  day.     A 
piece  work  rate  of  12  cents  per  unit  leads  to  a  production  of  40  units 
per  day.     Find  the  effect  on  wages  per  piece,  wages  per  hour  (10  hour 
day)  and  total  cost  per  piece  (a)  if  fixed  charges  are  25  cents  per 
day,  (b)  if  fixed  charges  are  $25  per  day. 

31.  Revise  the  tabulation  on  page  37  on  the  following  bases:  (a)  workman 
paid  for  1/4  the  time  saved,  (b)  workman  paid  for  1/2  the  time  saved. 

32.  Answer  Exercise  31  (a)  for  fixed  charges  20  cents  per  day;  (b)  for  fixed 
charges,  $8 . 00  per  day.     What  would  be  the  strategic  relation  between 
(ratio  of  fixed  charges  to  labor  cost)  and  (proportion  of  time  saved 
given  the  workman)? 

33.  Under  the  Rowan-Halsey  plan,  find  the  increase  in  hourly  wage  rate 


180  WORKS  MANAGEMENT 

for  each  10  per  cent,  reduction  below  standardized  time  in  time  con- 
sumed for  an  operation. 

34.  Tabulate  the  results  of  the  differential  piece  rate  under  the  conditions 
of  page  38,  if  fixed  charges  are  changed  to  12  cents  per  day. 

35.  Check  the  statement  made  on  page  38,  "  the  total  cost  per  bolt  would 
be  about  37  cents  in  either  case." 

36.  Using  the  data  on  page  38,  let  the  Taylor  differential  rates  be  12  cents 
per  bolt  for  a  daily  production  of  20  or  more,  up  to  40,  above  which 
the  rate  becomes   14  cents.     Tabulate  the  results.     Compare  them 
with  those  in  the  text.     How  would  they  be  modified  if  fixed  charges 
were  only  12  cents  per  day,  instead  of  $12? 

37.  Under  the  Gannt  bonus  plan,  page  40,  let  the  day's  production  be 
standardized  at  35  bolts.     Other  conditions  being  as  in  the  text, 
tabulate  the  results  and  discuss  the  change  from  the  workman's  stand- 
point.    If  fixed  charges  have  simultaneously  increased  to  $6.00  per 
day,  on  what  ground  might  the  employer  justify  the  change  made  in 
a  standard  day's  work? 

38.  Consider  the  systems  applied  on  gang  work,   page  41.     What  are 
their  relative  advantages  and  disadvantages? 

39.  Plot  a  new  "efficiency  curve"  on  the  diagram,  page  42,  and  tabulate 
the  results  under  conditions  otherwise  resembling  those  of  page  41. 

40.  Can  any  reasons  be  given  for  the  special  form  chosen  for  the  Emerson 
efficiency  curve? 

41.  In  the  case  of  the  Atchison  shops,  page  44,  show  that  if  by  "output" 
is  meant  average  value  of  output  per  man  per  day,  and  if  by  "cost" 
is  meant  average  labor  cost  per  man  per  unit  of  output,  the  three 
figures  given  are  irreconcilable. 

42.  Compare  the  production  per  girl  per  hour,  page  48,  under  the  old 
and  the  new  conditions.     Suggest  the  corresponding  probable  variation 
in  total  cost  of  inspection. 

43.  From  the   Baldwin    Locomotive  Works  tabulation,  page  52,  derive 
any  statistical  evidence  of  the  superior  position  of  apprentices  in 
Class  3. 


CHAPTER  V 

44.  Find  the  cost  of  the  following  bill  of  material  at  a  discount  of  40, 10,  10,  5, 
per  cent. : 

500  ft.  1         in.  bar  at  20  cents  per  foot. 
350  ft.  11/2  in.  bar  at  22  cents  per  foot. 
675  ft.  2         in.  bar  at  29  cents  per  foot. 
Ans.,  $172.10. 

45.  Prepare,  for  the  printer,  copy  for  the  "requisition"  form  described  on 
page  58. 

46.  Prepare  the  form  "  request  for  quotation"  with  card  duplicate,  described 
on  page  58. 

47.  Interpret  the  ciphers  K.SK,  B.OK,  SSK,  the  key-words  being  black 
horse. 


EXERCISES 


181 


48a.  In  an  ordinary  business  what  cipher  characters  will  be  oftenest  used? 

Which  ones  may  be  most  used  in  a  department  store? 
48&-  The  following  significances  are  surmised,  in  a  price  cipher: 
$1.25=P.YM        $9.98  =  U.UG        $3.60  =  R.IN 

Give  the  probable  form  for  the  complete  key- word. 

49.  Prepare  a  form  for  "acknowledgment  of  quotation." 

50.  Prepare  a  form  for  a  "purchasing  order." 

51.  Write  a  form  letter  to  a  shipper  urging  haste  in  the  delivery  of  materials 
due. 

52.  Devise  a  form  for  rubber  stamp  approval  of  invoices. 

53.  Interpret  "2  per  cent.  10  days;  30  days  net." 

54.  Consider  the  following  data  and  make  specific  recommendations  as 
to  further  investigation: 


Month 

Fuel  consumed, 
pounds 

Cost  of  fuel 

Product 

Heat  value  of 
fuel,  by  labora- 
tory test 

January  .... 

100,000 

$200.00 

500,000 

10,000 

February.  .  . 

110,000 

260.00 

480,000 

11,400 

March  

100,000 

245  .  00 

495,000 

11,330 

April  

105,000 

204.00 

511,000 

9,980 

May 

115,000 

265  .  00 

516,000 

11,200 

55.  A  man  owns  20  per  cent,  of  the  $10,000,000  stock  of  a  corporation 
which  pays  5  per  cent,  dividends.     He  is  also  individually  the  pro- 
prietor of  a  plant  which  may  sell  its  output  to  the  former  concern. 
Through  some  illicit  arrangement  he  has  the  opportunity  to  make  an 
individual  profit  of  $100,000  at  a  loss  to  the  former  company  just 
equal  to  this  sum.     Compare  his  interests  as  an  individual  and  as  a 
director  of  the  $10,000,000  corporation. 

Ans.,  he  may  gain  $80,000  by  sacrificing  the  corporation  interest. 

56.  Prepare  a  form  for  a  "stock  card,"  as  described  on  page  66,  and  show 
some  typical  entries  thereon. 

57.  Prepare  a  form  for  a  stores  department  daily  report  of  goods  received. 

58.  Prepare  the  "work  order"  and  "stock  order"  printed  forms  described 
on  page  67. 

59.  Give  the  essence  of  the  results  mentioned  at  the  beginning  of  page  68, 
in  a  single  percentage. 

60.  Subdivide  items  7  and  8,  page  70. 


CHAPTER  VI 

61.  Distinguish  between  "direct  expense"  (a  part  of  "prime  cost")  and 
"direct  factory  expense."     Give  an  example  of  each. 

62.  Take  the  following  data: 


182 


WORKS  MANAGEMENT 


Depart- 
ment 

Output 

Distributed 
.  direct  cost 

No.  of 
men 

Hours  of  time 

Cost  of  labor 

A  

1000 

$115 

35 

332 

$103 

B   .      . 

1400 

85 

45 

470 

70 

c 

600 

620 

160 

1680 

420 

D  

1100 

40 

12 

84 

23 

E  

1200 

300 

140 

1000 

200 

If  the  undistributed  "burden"  expense  is  $1185,  distribute  this  on  the 
basis  of  the  number  of  men  employed  and  find  the  total  cost  per  unit 
of  output  in  each  department. 

63.  Distribute  the  burden,  in  Exercise  62,  in  proportion  to  the  "  distributed 
direct  cost,"  and  tabulate  the  results. 

64.  Distribute  the  burden,  in  Exercise  62,  in  proportion  to  the  "output," 
and  tabulate  results. 

65.  A  linseed-oil  mill  produces  700,000  gal.  of  raw  oil.     Of  this  amount, 
165,000  gal.  are  boiled.     The  direct  costs  are:  raw  oil,  55  cents;  boiled 
oil,  56  cents  per  gallon.     The  burden  cost  applicable  to  oil  production 
in  general  is  $3500,  the  additional  burden  applicable  to  boiling  oil 
is  $675.     Find  the  total  cost  and  the  cost  per  gallon  of  each  kind  of 
oil:  (a)  as  computed  on  page  74;  (b)  by  distributing  the  general  burden 
in  proportion  to  quantity  rather  than  to  cost.     Which  of  the  methods, 
(a)  and  (b),  is  to  be  preferred? 

Ans.,  (a)  raw,  55.6  cents;  boiled,  56.9  cents;  (b)  55  1/2  cents  for  raw, 
56.91  cents  for  boiled. 

66.  In  Exercise  62,  distribute  the  burden  in  proportion  to  the  hours  of 
time,  and  tabulate  the  results. 

67.  In  Exercise  62,  distribute  the  burden  in  proportion  to  the  cost  of 
labor.     Tabulate  the  results. 

68.  Find,  from  Exercise  62,  the  cost  of  material,  the  average  wage  per 
hour,  and  the  average  daily  wage  per  man,  in  each  of  the  five  depart- 
ments. 

69.  A  plant  contains  seven  machines,  giving  the  following  data: 

1234567 

Hours  run 250     218     200       30     204     170     185 

Horse-power  hours  consumed 100010904000     900     408     510     925 

Find  the  average  load  in  horse  power  on  each  machine. 

70.  In  a  given  month,  the  total  power  developed  costs  $358.     The  machines 
in  Exercise  69  run  the  following  numbers  of  hours: 

Machine 123  456  7 

Hours 250     200       50     331/3     500     3331/3       200 

Find  the  power  charge  against  each  machine;  how  much  is  the  power 

charge,  for  each  of  the  machines,  per  hour  run? 

71.  $500  rent  is  paid  monthly  for  a  plant  in  which  50  men  are  employed 
10  hours  daily,  300  days  per  year,  at  20  cents  per  hour.     What  burden 
per  hour  does  the  distributed  rental  expense  add  to  each  man's  wage? 


EXERCISES 


183 


72.  Take  the  following  data: 
Direct  labor,  100,000  hours.  $20,000 

Materials 60,000 

Direct  expense 2000 

Wasted  time 1600 

Heat 

Light 

Foremen  and  supervisors. . . 
Employers'  liability  insur- 
ance. . 

Power 

Repairs  and  replacements . . 


400 
620 
1125 

320 
1158 
1050 

300 


Fire  insurance,  other  than  on 

buildings $  160 

Factory  indirect  expenses.  .  1650 

Selling  expense 675 

Administrative  expense 900 

Spoiled  work 130 

Standard  patterns,  etc 600 

Rent 1250 

Taxes 115 

Depreciation 600 

Fire  insurance  on  buildings .  75 

Non-productive  labor 390 


Repair  supervision 

It  is  agreed  that  the  indirect  expenses  chargeable  against  productive 
machine  time  shall  be  distributed  in  proportion  to  the  horse-power 
loads  thereon,  as  from  Exercise  69.  Rent  and  taxes  are  to  be  charged 
half  against  labor  time,  half  against  machine  time.  The  same  remark 
applies  to  depreciation  and  insurance  on  buildings.  Non-productive 
labor  is  divided  equally  against  machine  time  and  corrected  prime 
cost.  The  fourth  group  of  expenses  is  charged  against  corrected 
prime  cost,  following  the  tabulation  on  page  80. 

What,  in  accordance  with  this  tabulation,  are  the  elements  in  the  total 
cost  of  an  item  of  product  on  which  the  labor  cost  (100  hours)  was 
$22.00,  the  material  cost  $38.00,  and  the  direct  expense  $1.65,  if 
machine  No.  3  (only),  Exercise  69,  was  used  7  hours  in  producing  it? 


CHAPTER  VII 

73.  The  cost  of  a  plant  is  $40,000.     It  depreciates  by  $3000  each  year. 
The  apparent  profits  in  10  years  are  $22,000,  no  allowance  being  made 
for  depreciation.     What  are  the  real  profits  in  10  years? 

Ans.,  loss  is  $8000. 

74.  If  in  Exercise  73  no  change  has  occurred  in  other  assets  than  plant, 
and  if  the  $22,000  profits  have  been  distributed  to  the  owners,  compare 
the  net  assets  at  the  beginning  and  end  of  the  ten  year  period. 

Ans.,  have  decreased  $30,000. 

75.  Take  the  following  data: 


Operating  ex- 

Years 

Gross  earnings 

penses  and 

fixed  charges 

1900  

$60  000 

$40  000 

1901  

82,000 

55,000 

1902 

75  000 

38  000 

1903  

77,000 

53,000 

1904  

65,000 

54,000 

184  WORKS  MANAGEMENT 

The  last  column  does  not  include  depreciation.  The  capital  stock 
is  $200,000.  Tabulate  the  dividends,  depreciation  and  surplus  under 
the  conditions  (a)  10  per  cent,  dividend  on  stock  followed  by  $4000 
depreciation  charge  when  possible  or  by  as  'great  a  charge  as  is 
possible,  less  than  this  amount;  (b)  $4000  depreciation  charge,  $4000 
surplus,  balance  as  dividend. 

76.  Compare  the  probable  lives  of  (a)  a  masonry  dam,   (b)  a  wireless 
telegraphic  outfit,  (c)  an  automobile,  (d)  a  brick  dwelling  house. 

77.  In  Exercise  75,  an  engine  costing  $100,000  is  bought  in  1900.     Distribute 
this  cost  over  the  five  years  in  such  proportions  as  to  make  the  net 
earnings  constant. 

78.  Compare  interest  rates  in  the  Klondike,  New  York  and  Berlin.     What 
effect  have  these  differences  on  depreciation  charges? 

79.  A  plant  depreciates  by  $200,000.     Meanwhile,  it  has  been  extended 
to  the  value  of  $200,000  by  improvement  expenditures.     No  depre- 
ciation   charge    has    been    made.     Improvement    expenditures    have 
been  treated  as  operating  expense.     By  what  amount  has  the  value 
of   the   plant  changed?     By  what  amount  do  the  books  show  it  to 
have  changed? 

80.  A  machine  worth  $10,000  has  a  30-year  life  and  a  4  per  cent,  residual 
value.     With  interest  at  4  1/2  per  cent.,  what  should  be  the  annual 
allowance  for  depreciation? 

Ans.,  $157.44. 

81.  If  the  life  of  an  $8200  machine  is  11  years,  and  its  negative  residual 
value  is  $500,  what  is  the  annual  allowance  for  depreciation  with 
interest  at  6  per  cent.? 

Ans.,  $581 . 16. 

82.  How  does  the  value  of  the  fundamental  ratio  described  on  page  8 
affect  the  ratio  of  depreciation  to  gross  earnings?     In  what  sort  of 
industry  is  close  attention  to  depreciation  charges  relatively  unim- 
portant? 

83.  Suppose  the  machine  in  Exercise  80  to  be  in  good  condition  after  the 
expiration  of  the  30-year  period  and  to  keep  operating  for  8  years 
more.     How  much  money  will  accrue,  during  the  8  years,  in  its  depre- 
ciation reserve  fund  and  what  use  may  be  made  of  this  money? 
Ans.,  accumulations  will  be  $4052 . 16. 

84.  Find  by  logarithms  the  value  of  A  for  the  revised  interest  rate,  page  96. 
Ans.,  $6.90. 

85.  In  Exercise  84,  suppose  that  after  5  years  the  estimated  life  as  well  as 
the  interest  rate  is  revised,  and  that  it  is  assumed  that  the  machine 
will  last  only  3  years  more;  what  is  the  value  of  A  in  this  case? 
Ans.,  $12.10. 

86.  In  Exercise  80,  the  machine  is  ultimately  replaced  by  a  better  one 
costing  $18,000.     What  will  be  the  sources  of  this  $18,000? 

87.  If  the  tabular  figures  on  page  98  are  fairly  comparable  with  the  state- 
ment   regarding   street  railway  companies  at  the  top  of  page  87,  is 
the  management  generally  conservative? 

88.  Make  all  the  ledger  entries  necessary  to  describe  the  transactions 
in  Exercise  80  and  Exercise  86. 


EXERCISES  185 

CHAPTER  VIII 

89.  Should   the   following  expenditures   be   classed   as   "operating   cost" 
or  as  "betterments"?      (a)  Rebracing  an  old  boiler  to  fit  it  for  carrying 
higher  pressure,  (b)  retubing  a  boiler,  (c)  boring  an  engine  cylinder, 
(d)  replacing  common  cheap  asbestos  cocks  by  high  grade  expensive 
blow-off  valves,  (e)  mechanical  draft  equipment  in  an  existing  power 
plant,  (f)  stoker  appliances  in  an  existing  power  plant. 

90.  An  improvement  costing  $10,000  is  applied  to  a  plant  worth  $100,000. 
If  fixed  charges  are  15  per  cent,  on  the  investment  and  the  improve- 
ment causes  a  saving  of  5  per  cent,  on  an  annual  output  of  $200,000, 
what  is  the  net  percentage  return  on  the  improvement  investment? 
If  the  annual  output  of  the  plant  is  $35,000,  other  conditions  being 
the  same,  what  result  follows? 

Ans.,  net  returns  are  85  per  cent,  and  21/2  per  cent.,  respectively. 

91.  Which  is  preferable:  the  expenditure  of  $50,000  on  a  plant  producing 
$200,000  yearly,  for  the  purpose  of  increasing  output  20  per  cent, 
when  the  profits  are  uniformly  25  per  cent,  of  the  output  value;  or  the 
expenditure  of  the  same  sum  for  producing  a  saving  of  5  per  cent, 
on  the  annual  output? 

Ans.,  the  gross  return  either  way  is  $10,000  annually. 

92.  An  opportunity  exists  for  a  saving  of  $1000  per  month  by  the  expen- 
diture of  $4500,  this  saving  being  immediately  attainable.     By  deferring 
expenditure  for  6  months  and  increasing  it  to  $6500,  the  saving  may  be 
increased  to   $1100   monthly.     If  the   total   fixed   charges   on  either 
improvement     expenditure    are    30    per    cent,    annually,    and    both 
machines  are  expected  to  last  4  years,   which  should  be  installed? 
What  will  be  the  loss  if  the  wrong  expenditure  is  made? 

Ans.,  the  lives  of  the  machines  may  be  ignored,  because  "total  fixed 
charges"  include  depreciation.  Unless  the  $6500  machine  is  installed 
there  will  be  a  loss  of  $2400. 

93.  What  is  the  ratio  of  fixed  charges  per  unit  of  output,  in  10-hour  day 
service,  to  that  in  24-hour  day  service,  if  the  average  hourly  production 
under  the  latter  plan  is  0.9  that  under  the  former  plan? 

Ans.,  2.16. 

94.  What  is  the  ratio  of  labor  cost  per  unit  of  output,  in  8-hour  day  service, 
to  that  in  12-hour  day  service,  if  the  workman's  wage  per  hour  is 
25  per   cent,  greater  in  the  former  case,  and  his  output  per  hour  is 
20  per  cent,  greater?  . 

Ans.,  1.04. 

Compare  (a)  the  number  of  men  employed,  total  output  being  fixed, 

and  (b)  the  average  daily  wage. 

Ans.,  (a)  inc.    25  per  cent.;  (b)  16  2/3  per  cent.  dec. 

95.  A  corporation  starts  in  business  with  an  insurance  fund  of  $1,000,000, 
which  is  regarded  as  ample.     The  value  of  the  insurable  property  does 
not  change,  and  the  insurance  fund  bears  5  per  cent,  interest.     What 
shall  be  done  with  the  earnings  of  this  fund? 

96.  If  in  the  example  at  the  end  of  page  107   (footnote),  the  insurance 


186  WORKS  MANAGEMENT 

policy  was  for  $10,000,  what  percentage  gross  gain  resulted  from  the 
$500  expenditure  for  improvement? 
Ans.,  50 . 8  per  cent. 

97.  Buildings  are  insured    for  $6500,  stock  for  $9500,  both  at  full  cash 
value  and  at  a  rate  of  85  cents.     A  fire,  after  premiums  have  been 
paid  for  8  years,  causes  a  building  loss  of  $3900.     What  amount  of 
insurance  could  be  collected  under  the  "contribution  clause"? 
Ans.,  $1980. 

98.  A  plant  in  process  of  erection  represents  the  contractor's  expenditure 
of  $80,000,  on  which  the  owner  has  made  payments  of  $60,000,  in 
strict   accordance    with   the    contract   terms.     The  contractor  pays 
insurance  premiums  on  a  policy  amounting  to  80  per  cent,  of  the 
value  of  work  in  progress.    A  total  loss  occurs.    State  all  the  trans- 
actions involved  in  a  settlement.     How  much  does  each  party  lose, 
if  the  aggregate  of  premiums  paid  is  $500? 

99.  A   partnership   has   assets  of  $100,000,  and  owes  $60,000,   exclusive 
of  loans  from  the  three   partners  amounting  to  $2500,  $6500  and 
$1000,  respectively.     The  capital  put  in  by  the  three  partners  was 
$5000  for  each.     Earnings  are  divided  in  the  proportions,  42/100, 
36/100,  22/100.     State  the  distribution  of  assets  upon  termination 
of  the  partnership. 

Ans.,  partners  get  $13,800,  16,900  and  $9300,  respectively. 

100.  In   organizing   a   corporation,    a   number   of   individuals   contribute 
$400,000  in  return  for  $4500  shares  (par  $100)  of  stock.     The  balance 
of  the   capital  stock,  5500  shares,  is  floated  at  90  less  a  brokerage 
commission  of  $160,000.     The  sum  of  $65,000  is  expended  in  prelimi- 
nary expenses.     What,  then,  are  the  total  real  assets  of  the  com- 
pany?    What    proportion    of    its    capitalization    may    be    regarded 
as  "  water"? 

Ans.,  (a)  $670,000;  (b)  $330,000  =  33  per  cent. 

101.  Are    the    following   things   patentable?     A  roulette  wheel;  a  steam 
turbine  direct-connected  to  an  air-compressor;  a  rotary  engine  of  the 
type  invented  by  Hero  of  Alexandria:  a  rug? 

102.  A  trust  is  formed,  which  absorbs  22  mills  having  aggregate  physical 
assets    of    $19,000,000.     The    capital    stock    issued    is    $50,000,000. 
What  items   may  be   suggested   as   offsetting  the   apparent   deficit 
of  $31,000,000? 

103.  A  railroad  whose  stock  has  a  par  value  of  $50  issues  a  15  per  cent, 
stock  allotment  at  par  when  its  stock  is  selling  at  165  1/2  per  cent. 
What  are  the  rights  worth,  per  share  of  old  stock?     How  does  the 
new  stock  issue  affect  the  surplus  of  the  company? 

Ans.,  value  of  rights  is  $4.91  1/4. 

104.  On  the  general  principles  suggested  by  the  diagrams  of  pages  121, 
122  and  123,  prepare  a  chart  of  the  tabulated  organizations  on  pages 
121  and  124. 

1Q5.  Compare  the  salary  costs  under  the  two  plans  of  page  123. 

106.  Prepare  a  chart  for  a  combined  line  and  staff  organization  in  a  large 
engineering  works,  giving  suggestive  titles  to  the  various  officials. 

107.  On  an  article  which  sells  at  retail  for  $100,  the  retailer  expects  a 


EXERCISES  187 

profit  of  40  per  cent.,  the  wholesaler  of  10  per  cent.  What  are 
the  prices  to  be  charged  by  the  manufacturer  to  the  wholesaler 
and  by  the  latter  to  the  retailer? 

108.  Consider  two  mines,  a  and  6.     The  former  has  a  concentrator,   c, 
immediately  adjacent,   which   reduces  the   weight   of   materials  by 
two-thirds.     There  are  two  smelters,  d  and  e,  in  which  the  working  costs 
are  respectively  4  and  5  cents  per  100  Ib.  of  material  received.     The 
working  cost  in  c  is  1/2  cent  per  100  Ib.  of  raw  material.     Freight  from 
c  to  d  is  9  cents;  from  a  to  d  is  9  cents;  from  a  to  e  is  3  1/2  cents;  from 
b  to  e  is  2  cents;  from  c  to  e  is  3  1/2  cents;  from  b  to  d  is  2  3/4  cents, 
all  per  100  Ib.     Assume  that  mine  a  brings  its  product  to  the  con- 
centrator at  a  cost  of  32  cents  per  100  Ib.;  that  mine  b  can  put  its 
product  on  cars  at  29  1/2  cents  per  100  Ib.     Smelter  d  obtains  13  1/2 
cents  per  pound,  less   freight  of  19  cents  per  100  Ib.,  for  the  final 
product  which  it   produces   (15  Ib.  per  100  of   raw  material    from 
concentrator,  51/2  Ib.  per  100  of  raw  material  from  mines).     Smelter 
e  similarly  obtains  13  3/4  cents,  less  freight  of  7  cents,  with  produc- 
tions of  15  1/2  and  5  3/4  Ib.,    respectively.     Smelter  by-products 
are  valueless.     Find  the  profits  per  100  Ib.  of  material  brought  out 
of  each  of  the  mines,  under  each  of  the  six  conditions  possible. 

109.  Make  a  chart  of  the  organization  tabulated  on  page  130. 

CHAPTER  IX 

110.  What    classes    of   entries   are   included   in   the   following   accounts: 
Office    fixtures,    stable    expense,    interest,    royalties,   allowances    to 
customers? 

111.  To  what  accounts  should  entries  be  made  for  the  following:     A  sale 
of  stable  manure;  a  charitable  contribution;  insurance  paid  in  advance? 

112.  Are  balances,  in  Exercise  110,  resources  or  losses,  liabilities  or  gains? 

113.  What  would   be  the  objections  to  the  practice  of   never  taking  an 
inventory? 

114.  At  the  beginning  of  the  fiscal  year  a  business  presents,  after  closing 
the  books,  the  following  balance  sheet: 

Dr.  Cr. 

John  Smith,  owner $2500 

Thomas  Brown,  owner 2750 

Real  estate $2200 

Office  furniture  and  fixtures.      1600 

Bills  receivable 1200 

Bills  payable 2200 

Merchandise 2500 

Cash 400 

Royalties  accrued 450 


7900  7900 

Make  ledger  entries  for  the  following: 

(a)  Owners  buy  merchandise  from  J.  Jones   for  $1600,  paying  cash 
$200  and  note  $1400. 

(b)  Salaries  aggregating  $1100  are  paid  in  cash. 


188  WORKS  MANAGEMENT 

(c)  Merchandise  aggregating  $2250  is  sold  for  cash. 

(d)  Office  expense  $100  is  paid  in  cash. 

(e)  A  loan  of  $500  is  obtained  from  the  bank,  a  note  being  given. 

(f)  The  note  under  (a)  is  paid,  with  interest  for  6  months  at  5  per  cent. 

(g)  Bills  receivable  from  last  year's  balance  are  paid  in  cash,  less  a 
bad  debt  of  $200,  plus  interest  of  $160. 

(h)  Bills  payable  under  last  year's  balance  are  paid,  with   interest 

amounting  to  $30 . 50,  in  cash. 
(i)  Accrued  royalties  under  last  year's  balance  are  paid  in  cash. 

115.  In  Exercise  114,  inventory  shows  merchandise  to  be  worth  $2260, 
office    furniture    and    fixtures    $1500.     Other    assets    (except    bills 
payable  and  cash)  are  as  before.     Interest  accrued  under  the  bank 
note  (e)  amounts  to  $22 . 00.     Make  the  closing  entries  and  prepare 
the  balance  sheet,  crediting  net  profits  to  the  owners  of  the  business 
in  equal  shares. 

116.  In  Exercise  115,  what  is  the  value  of  the  "quick  assets?" 

117.  Check  the  statement  on  pages  144,  145. 

118.  Compute  the  gross  earnings  per  mile,  for  each  year  from  1896  to  1905, 
page  145.     Compute  the  average  for  this  period. 

119.  Check  the  tables  on  pages  146  and  147,  as  far  as  is  possible. 

CHAPTER  X 

120.  Show  how  the  seven  building  widths  mentioned  on  page  155  may  be 
obtained  while  using  only  the  two  standard  spans. 

121.  Freight  on  oil  in  10,000  gallon  tanks  from  Buffalo  to  Boston  is  2 
cents  per  gallon.     In  barrels   (holding  50  gallons)  it  is  $1 . 75  per 
barrel.     It  costs  $1.45  per  barrel  to  put  oil  in  barrels  at  Buffalo, 
$1.05  to  do  this  in  Boston.     There  is  no  leakage  on  tank  car  ship- 
ments; the  average  loss  to  the  shipper  by  leakage,  on  barrel  ship- 
ments, is  1  per  cent.     What  is  the  gross  gain  per  10,000  gallons,  by 
shipping  oil  in  tanks  from  Buffalo  and  barrelling  it  in  Boston?     What 
factors  must  be  considered  as  operating  against  this  gain? 

122.  Suggest  a  grouping  of  buildings,  on  a  square  plot,  across  which  a 
canal  runs  diagonally,   for  a  locomotive   works  including  foundry, 
forge  shop,  pattern  shop,  pattern  storage,  power  plant,  boiler  shop, 
machine  shop,  paint  shop,  carpenter  shop,  erecting  shop,  storehouse 
and  offices. 

123.  WTrite   a  letter  accepting  a  contractor's  bid  for  doing  certain  work 
according  to  plans  and  specifications  submitted  and  appointing  a 
day  for  the  execution  of  contract. 

124.  In  Exercise  123,  what  objection  may  be  made  to  the  following  clause 
in  such  a  letter:  "We  are  prepared  to  accept  your  proposal  providing 
you  can  furnish  satisfactory  sureties." 

125.  Suppose,  in  Exercise  98,  the  contractor  has  allowed  his  insurance 
premium  payments  to  lapse.     What  is  the  obligation  of  his  surety? 

126.  On  pages  170,  171,  which  of  items  A  to  Q  would  be  found  by  inventory 
of  the  physical  property? 

127.  In  the  Worcester  case,  pages  171,  172,  state  in  dollars  the  contentions 
of  both  parties  and  the  decision  of  the  court.     Who  won? 


INDEX 


Accidents  to  workmen,  105,  133 
Accounting,  136,  138,  139 

depreciation,  98,  99 
Accounts,  classification  of,  12 

impersonal,  137 

store  room,  65 
Administrative  cost,  10,  73 
Agency,  127,  167 
Agent,  purchasing,  63 
Annuity  table,  89-91 
Apportionment  of  burden,  72-81 

of  labor  cost,  30 
Apprenticeship,  50,  51,  52,  116 
Arbitration,  134 
Architect,  163,  167 
Art  of  management,  70 
Assembling,  46,  68,  159 
Assets,  quick,  143 
Associations  of  contractors,  167 
A.  T.  &  S.  F.  R.  R.,  44,  54 
Automatic  sprinkler  system,  76 
Axioms  in  organization,  118 

Bad  organization,  121 

Baldwin  Locomotive  Works,  51,  52 

Balancing  books,  138,  141 

Basis  for  cost  division,  2,  4 

Bays,  building,  155 

Belting,  46 

Betterments     (improvements),     27, 

84,  85,  88,  97,  98    100,  101 
Betterment  enterprises,  149 
Book-keeping,    11,    136,    138,    139, 

143 

Books  of  account,  139 
Bonds,  82,  113,  169 
Bonus,  39 

Bonus  system,  39,  41 
Branch  offices,  127 
Brick  and  steel  buildings,  164 
Building  bays,  155 


Buildings,  brick  and  steel,  164 

concrete,  165 

contracts  for,  165,  166 

cost  of,  165 

cross-sections,  153 

grouping,  158 

heights,  155 

standards,  153 
Burden,  9,  72-81 
Burden  chart,  80 
Buying,  57-65 

Cash  book,  139 

Cash  discount,  60 

Caveat,  112 

Centralized  buying,  61 

Charts,  10,  22,  23,  24,  27,  28,  42,  80 

Chaser,  68 

Chronological  chart,  24 

Cipher,  59 

Classification  of  costs,  5,  8,  12 

of  industries,  8,  12 
Closed  shop,  133 
Closing  the  books,  138,  141 
Collusion,  62 
Committee  system,  124 
Comparative  charts,  23 
Compound  interest,  87,  88 
Compound  interest  tables,  91,  93-96 
Concealed  profits,  97 
Concentrator,  129,  158 
Concrete  building,  165 
Consignments,  128 
Construction  contracts,  165 
Consulting  engineer,  163,  167 
Consumption  records,  17,  26,  27 
Consumption  unit  cost  divisor,  4 
Contracts,  166 
Contract,  cost  plus  fixed  sum,  164 

cost  plus  percentage,  164 

extras  on,  167, 

189 


190  INDEX 


Contract,  municipal,  166 

penalty  on,  167 

uniform,  168 
Contracting,  64,  148,  164 
Contractors'  associations,  167 
Contract  piece  work,  41 
Contribution  clause,  108 
Conveying,  161 
Corporations,  110 

bonds,  82,  113,  169 

management,  110 

organization,  110 

statements,  143 

stock,  85,  110,  113,  114 
Cost,  administrative,  10,  73 

basis,  2,  4 

chart,  10 

classification,  5,  8,  12 

direct,  9 

divisor,  2,  4 

factory,  10,  12 

fixed,  9,  29,  36,  72-81 

labor,  5,  30 

land,  148 

materials,  5 

mill  buildings,  165 

prime,  9,  10,  12 

unit,  2,  4 

Cost  keeping,  10,  11,  56,  129 
Cotton-seed  oil  mill,  4,  155 
Crane,  155,  159,  160 
Credit,  136 
Cumulative  stock,  110 

Day  wage  system,  32 
Debit,  136 
Deferred  repairs,  83 
Deficit,  143 
Departmental  costs,  5 
Departmental  division  of  burden,  73 
Departmental  organization,  122 
Depreciation,  79,  82-99,  142 

accounting,  98,  99 

definite  method,  85 

fund,  87 

rates,  86,  87 

reserve,  88-99 

reason  for,  83 

Tables,  88-95 


Despatching,  46,  67,  68,  69 
Determining  ratio,  8,  115,  148 
Development  of  organization,  115 

of  plant,  100 
Differentials,  6,  7,  74 
Differential  piece  rate,  38 
Direct  cost,  9 
Direct  expense,  9 
Direct  labor  basis  for  burden,  75 
Discount,  cash,  60 
Disposal  of  waste,  162 
Disputes,  industrial,  134 
Distribution  of  burden,  72-81 
Distribution  of  depreciation  reserve 

88-99 

Dividends,  85,  143 
Divisional  organization,  122 
Divisor  for  costs,  2,  4 
D.  L.  &  W.  R.  R.,  145 
Doherty,  H.  L.,  170 
Double-entry  bookkeeping,  136 
Drafting  room,  48 
Duties  of  manager,  100,  121 

Economy  in  materials,  169 
Effect  on  workmen,  53,  133 
Efficiency,  2,  34 

curve,  42. 

engineers,  57 

labor,  30 

purchasing,  61 
Emergency  purchasing,  64 
Emerson,  Harrington,  70 

efficiency  system,  41 
Employers'  liability,  105,  133 
Engineering  graduates,  116 

industrial,  157 

schools,  118 
Engineers,  consulting,  163,  167 

efficiency,  57 

mill,  148 

Equipment,  life  of,  86,  87 
Erecting,  46,  68,  159 
Estimates,  102 
Expense,  9,  72-81,  138 

direct,  9 

factory,  9,  72 

final  indirect,  79 

general,  73 


INDEX 


191 


Expense,  indirect,  79 
Extensions,  planning  for,  152 
Extras  on  contracts,  167 

Factor  (see  Burden). 
Factory  cost,  10,  12 
Factory  expense,  9,  72 
Final  indirect  expense,  79 

renewals,  84,  99 
Financial  statements,  143 
Fire  losses,  106 
Fixed  cost,  9,  29,  36,  72-81 
Foreign  patents,  112 
Foremen,  78 

Forfeiture  on  contracts,  167 
Forms  of  organization,  114,  121 
Freight,  7,  157 
Fuel  for  factories,  149 
Fund,  depreciation,  87 
Fundamental  ratio,  8,  115,  148 

Gang  bonus,  41 
Gannt,  H.  L.,  44 

bonus  system,  39 
General  Electric  Co.,  30 
General  expense,  9,  29,  36,  72-81 
Graduates,  technical,  116 
Graphical  records,  20-28 
Grouping  of  buildings,  158 
Growth  of  plant,  100 

Halsey  premium  system,  36 
Heights  of  buildings,  155 
High  speed  steels,  29 
Hoist,  traveling,  160 
Horse-power  basis  for  burden,  75 
Hours  of  labor,  103 
Humphreys,  A.  C.,  89-96 

Impersonal  accounts,  137 
Improvements,  27,  84,  85,  88,  97,  98, 

100,  101 

Improvement  expenditures,  27 
Incidental  records,  28 
Increase  of  capital  stock,  114 
Indemnity  insurance,  105 
Indirect  expense,  9,  72,  79 
Industrial  egineering,  57 
disputes,  134 


Industrial  organization,  100-135 

railroad,  161 

Industries,  classification  of,  8 
Inspection,  47,  61 
Insurance,  79, 104, 105, 106,  155, 159 

rates,  107 
Interest  on  material  stocks,  66 

rates  87,  88 
Inventory,  66,  69,  139 
Invoice,  60,  66 

Jib  crane,  160 
Journal,  139 

Laboratory,  61,  162 
Land,  148,  163 
Labor,  29-54 

apportionment  of  cost,  30 

cost,  5 

efficiency,  30 

non-productive,  79 

organization  of,  131 

reforms,  132 

systems  for  paying,  32,  43 

-hour,  2 

unions,  120,  133 
Layout  of  plant,  148 
Ledger,  139 
Length  of  day,  103 
Liability,  137,  142 
Licensing  architects,  163 
Lighting,  78,  154 
Liquidated  damages,  167 
Line  organization,  120,  133 
Linseed-oil  mill,  4,  6,  12,  74 
Listed  stock,  113 
Lives  of  equipment,  86,  87 
Location  of  plant,  148 
Lockouts,  134 
Locomotives,  162 
Locomotive  works,  4,  51,  52 
Logarithms,  88 
Loss  and  gain,  138,  142 

Main,  Chas.  T.,  171 
Maintenance  expense,  104 
Management,  1,  70 

corporations,  110 

units,  1 


192 


INDEX 


Management,  scientific,  1,  48 
Manager,  100,  103,  121 
Manufacturing  cost,  12 
Mapping  processes,  155-159 
Material,  55-70 

costs,  5 

economy  in,  69 
Methods  of  purchasing,  57 
Mill  buildings,  164,  165 

construction,  164 

cost,  165 

engineer,  148 
Monthly  statement,  144 
Motion  study,  50 
Municipal  contracts,  166 
Mutual  insurance,  106 

Non-productive  labor,  79 

Objections,  definite  burden  system, 
81 

modern  labor  systems,  49 

ordinary  burden  system,  76 

piece  work,  33 
Oil-mill,  4,  6,  12,  74,  155 
Open  shop,  133 
Order,  purchasing,  59 

shop,  30 
Organization,  axioms,  118 

corporation,  110 

departmental,  122 

development,  115 

divisional,  122 

forms,  114,  121 

industrial,  101-135 

line,  120,  133 

labor,  120,  131,  133 

staff,  124 

trusts,  130 
Ownership,  forms  of,  107 

Paper  mill,  3,  157,  158 
Partnership,  107,  108 

termination  of,  109 
Patents,  111 

foreign,  112 

Payment  of  labor,  32,  41 
Payroll,  16 


Penalty  on  contracts,  167 
Physical  valuation,  169 
Piece  rates,  50 

work,  32,  33,  35,  41 
slip,  5,  31 
differential,  38 
Plant,  148 

depreciation  of,  83,  86,  87 

layout,  148 

location,  148 

valuation,  168 
Pools,  167 
Power  in  factories,  9,  14,  76,  162 

plant,  8,  17,  18,  19,  20 

valuation,  171 

water,  149,  170 
Premium  (see  Bonus). 

system,  36 
Price  cipher,  59 
Prime  cost,  9,  10,  12 

as  a  burden  basis,  75 
Problems,  cost-keeping,  10,  56 

purchasing,  62 

transportation,  129 
Process  mapping,  155,  159 
Profit  and  loss,  138,  142 

-sharing,  34 
Promoter,  110,  148 
Providing  for  extensions,  152 
Public  service  corporations,  13,  59, 

87,  98 

Pulp  mill,  158 
Purchasing,  57-65 

agent,  63 

importance  of,  57 

methods,  57 

negotiations,  64 

order,  59 

problems,  62 

public  service  corporations,  57 

Quick  assets,  143 
Quotations,  58-60 

Railroads,  44,  54,  70,  101,  122,  145 

industrial,  61 

operating  expense,  13 
Rates,  depreciation,  87 

insurance,  107 


INDEX 


193 


Rates,  piece  work,  50 
Rate  of  interest,  87,  88 

setter,  50 

Reclassifying  the  trades,  52 
Records,  11-17 

consumption,  26,  27 
Reduced  rate  clause,  108 
Reenforced  concrete,  165 
Reforms  proposed  by  labor  unions, 

132 

Renewals,  final,  99 
Rent,  78 
Repairs  and  replacements,  79,  83,  84 

deferred,  83 

Request  for  quotation,  58,  60 
Requisition,  58,  69 
Residual  value,  86 
Reserve  for  depreciation,  88-99 
Resources,  137,  142,  143 
Responsibility  of  manager,  103 
Restriction  of  production,  133 
Rights,  stock,  114 
Routing,  46,  67,  68,  69 
Rowan's  formula,  37 

Salesmen,  126 
Saw-tooth  roof,  154 
Scab  shop,  133 
Schedule,  67 

Schools,  engineering,  118 
Scientific  management,  1,  48 
Secondary  statements,  143 
Secrets,  trade,  112 
Self-hardening  steels,  29 
Selling  expense,  10,  72,  145 

systems,  125 
Setting-up,  46 
Shop  order,  30 
Shutting  down,  104 
Sites  for  plants,  150   • 
Skeleton  steel  buildings,  164 
"Slow-burning"  buildings,  164 
Smelter,  129,  158 
Space  data,  150 
Spans,  154,  155 
Special  charts,  27,  28 
Specialties,  6,  7,  74 
Specifications,  166,  168 
Speculation,  60,  63 


Speed  boss,  45 
Sprinkler  system,  76 
Staff  organization,  124 
Standardization,  34,  49 
Standards  for  buildings,  163 
Staples  and  specialties,  6,  7,  74 
Statements,  monthly,  144 

secondary,  143 
Statistics,  11-17 

graphical,  20-28 

incidental,  28 

unnecessary,  19 
Stock,  cards,  66 

classes  of,  110 

corporations,  85,  110,  113,  114 

department,  6 

despatching,  46,  67 

insurance  companies,  106 

inventory,  66 

material,  66 

order,  67,  68 

rights,  114 

watered,  113 
Storage  of  product,  104 
Storeroom,  6,  14,  65-69 
Storied  buildings,  154 
Street  railways,  87,  113 
Strikes,  134 
Superintendent,  71 
Supervision,  10,  73 
Supply  of  workmen,  50 
Surcharge,  9,  72-81 
Surety,  167 
Systems,  cost- keeping,  56,  129 

paying  labor,  32,  43 

Table,  annuity,  89-91 

compound  interest,  93-96 

Tables,  depreciation,  89-96 

Tank  cars,  158 

Tank  stations,  158 

Taylor,  F.  W.;  39,  43,  47,  116 

Taxes,  79 

Technical  graduates,  116 

Termination  of  partnership,  109 

Tester,  45 

Testing  laboratory,  61,  162 

Time  basis  for  burden,  75 
cards,  5,  31 


194 


INDEX 


Time  study,  45 

Totalized  charts,  22 

Totalized  consumption  record,  26,  27 

Tracer,  68 

Tracks,  161 

Trade  secrets,  112 

unions,  120,  133 
Trades,  reclassifying,  52 
Training  workmen,  50-52,  116 
Transfer  table,  160 
Transportation  in  the  plant,  156,  161 

facilities,  148 

problems,  129 

by  water,  149 
Traveling  hoist,  160 
Trial  balance,  138 
Truck,  160 
Trusts,  128 
Turntable,  161,  162 

Uniform  contract,  168 
Union  labor,  35,  120-133 
Unit  costs,  2,  3,  4 


Units  in  management,  1 
Unnecessary  records,  19 

Valuation  of  plant,  168,  169 

of  water  power,  171 
Value,  residual,  86 
Voucher,  15,  16,  60 

Watered  stock,  113 
Water  power,  149,  170 

transportation,  149 
Waste  disposal,  162 
Welfare  work,  149 
When  to  improve,  102,  150 
Wholesaling,  127 
Worcester  case,  171 
Work  order,  67 
Workman's  interest,  53,  133 
Workmen,  training  of,  50,  51,  52,  116 
Workmen's  compensation,  105,  133 
Working  hours,  103 

Yard  room,  150,  153 


BOOR 


M  "^=====:::::==::=^-— —  ^Ay 


YC  24250 


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UNIVERSITY  OF  CALIFORNIA  LIBRARY 


